13-13038 Stewart (Doc. # 81)

In Re Stewart, 13-13038 (Bankr. D. Kan. Mar. 6, 2015) Doc. # 81

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SIGNED this 6th day of March, 2015.




Case No. 13-13038
Chapter 7



The State of Kansas has determined that the earned income tax credit
(EIC) portion of a bankrupt debtor’s federal and state income tax for one year
is exempt, except for collection of child support. Bankruptcy trustees may not
recover that part of a debtor’s prepetition federal or state income tax refund
for the benefit of the estate. Here, the debtors made a general assignment of a
portion of their refunds to their attorney to cover his fees and the filing fee in
this case. They argue that these fees should be collected solely from the non


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exempt portion of the refunds; the trustee says that the EIC portion may bear
part of that burden as well. Because the debtors’ assignment didn’t
discriminate between the exempt and non-exempt portions, and because
nothing in Kansas or federal law precludes a debtor from encumbering
otherwise exempt property, the assignment, after being allocated between the
state and federal refunds, may be deducted from the whole tax refund (net of
the child support setoff), not just the nonexempt portion.1


Debtors Douglass and Shawnea Stewart filed their chapter 7
bankruptcy case on November 26, 2013. Shortly before filing, debtors granted
an assignment of their 2013 federal and state income tax refunds to their
bankruptcy attorney Martin Peck for his attorney fees in the amount of $1,175
and their filing fee in the amount of $306.3 They also assigned their refunds to
two former spouses of Mr. Stewart to pay back child support obligations that
accrued during 2013. The assignment made no distinction between the EIC
portion and non-EIC portion of their refunds.

1 Debtors appear by their attorney Martin J. Peck. The chapter 7 trustee J.
Michael Morris appears on his own behalf.
2 The parties submit this matter to the Court on stipulations and briefs. See
Dkt. 61 and 64 (Stipulations and supporting Exhibits A-F).
3 The assignment in this case assigns the 2013 tax refunds and does not restrict
the assignment to the pre-petition portion of their refunds.
Cf. In re Hunter, No. 09-12270, 2011 WL 1749933 (Bankr. D. Kan. May 5,

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The debtors’ 2013 tax returns reflect a federal refund of $7,932 of which
$6,044 is an earned income tax credit and a state refund of $1,063 of which
$1,027 is an earned income tax credit. The Kansas Department of Children and
Families (KDCF) setoff these refunds to collect Mr. Stewart’s child support
arrearage. It setoff $1,119 from the federal refund (but refunded $1,084.25
back to debtors) and setoff $884.73 from the state refund. Debtors received the
balance of their refunds in February of 2014 – a total of $8,075.52 comprised
of a net federal refund of $7,897.25 and a net state refund of $178.27. From
these refunds, debtors paid $1,481 to Mr. Peck for his attorney fees and the
bankruptcy filing fee pursuant to the assignment.

In May of 2014 the trustee filed the subject motion for turnover of the
2013 tax refunds.4 He sought the estate’s share (330/365ths = .9041095) of the
net refunds after application of the EICs and attorney fees assignment, and
the KDCF set off, or $1,354.77. The trustee asserts that the EIC portion of the
refunds must share ratably with the non-EIC portion with regard to the
amount of the attorney fees assignment. The trustee also sought turnover of
the $200 sanction previously ordered against debtors for failing to timely
provide their tax returns to the trustee.5


4 Dkt 49 and 55.
5 The trustee abandoned his request for turnover of non-exempt wages. See
Dkt. 61, ¶ 8.

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This case presents a slight variation on an otherwise common theme:
reconciling a trustee’s turnover rights with a debtor’s lawyer’s tax refund
assignment for fees. The variation results from these debtors’ refunds having
been set off by the Kansas Department of Children and Families to pay child
support arrearage claims against Douglas Stewart and the fact that these
debtors’ earned income credit accounts for such a large portion of their refunds.
The setoff issues have been resolved by agreement between the trustee and the
debtors, so the remaining question is whether the debtors’ general assignment
of their refund for attorney fees includes the EIC portion of the refund or
whether the fees should be withheld solely from the non-exempt, non-EIC
portion. Doing the latter burdens the estate while doing the former burdens
the debtors’ KAN. STAT. ANN. § 60-2315 EIC exemption.

Kansas exempts the federal and state EIC portion of a bankruptcy
debtor’s tax refunds for one tax year.6 Typically, debtors exempt that part of
their state and federal refunds for the year preceding the one in which they
file. The exemption statute also says that nothing in § 60-2315 should be read
to limit the state or federal government’s rights to offset or attach the EIC
portion for payment of support or maintenance. Accordingly, in this case,
KDCF’s intercept of the debtors’ 2013 refund does not impair the debtors’
exemption and doesn’t factor into today’s decision.

6 KAN. STAT. ANN. § 60-2315 (2013 Supp.).

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I have issued a series of orders dealing with attorney fee assignments
and trustee turnover. These orders can be distilled to several principles that
guide my decision here. First, I have previously ruled that depending upon the
nature of the assignment, an assignment for attorney’s fees or costs (including
filing fees advanced) should be prorated between the debtor’s federal and state
tax refunds based upon the proportion each refund’s amount bears to the sum
of the refund amounts. Those fees should then be deducted from the refunds
before the trustee attempts to allocate them between the pre- and post-petition

Likewise, I have held that a set off for a tax debt should not be taken
from either the exempt or post-petition portion of a debtor’s refund; instead,
burdening the estate’s share of the refund with a tax set off is entirely
consistent with the priority scheme of the Bankruptcy Code. Just as the tax
debt would be paid before general unsecured creditors in a chapter 7
distribution, the funds a taxing authority withheld from the prepetition refund
should reduce the estate’s take from the refund.8 Finally, I have held that a

7 Redmond v. Carson (In re Carson), 374 B.R. 247 (10th Cir. BAP 2007).
Allocating the debtor’s tax refund between the pre- and post-petition years is
required by In re Barowsky, 946 F.2d. 1516, 1518 (10th Cir. 1991) (determiningthat the pre-petition portion of a debtor’s tax refund is property of thebankruptcy estate when the relevant tax year ended post-petition). See also In
re Roy, No. 12-11246, Dkt. 39 at pp. 7-8 (Bankr. D. Kan. Sept. 24, 2013)
(Unpublished) (prorating refund assignment for attorney fees between federal
and state refund prior to Barowsky pre- and post-petition allocation).
8 In re Roy, No. 12-11246, Dkt. 39 at pp. 8-10 (Bankr. D. Kan. Sept. 24, 2013).

Case 13-13038 Doc# 81 Filed 03/06/15 Page 5 of 9

specific pre-petition assignment of that portion of the debtor’s refund that
accounts for the prepetition portion of the filing year is enforceable against the
trustee in a turnover proceeding because the debtor’s making that assignment
is conceptually identical to the debtor paying a retainer from funds that would
otherwise wind up in the estate.9

In this case, the Stewarts seek to further refine this rule by asking me
to hold that a general assignment of a refund for attorney’s fees cannot be
charged against the EIC portion of their tax refund because it is exempt. They
rely not on my ruling in In re Roy, but on its math. In Roy, I overruled the
trustee’s assertion that the debtor’s EIC refund could be apportioned between
the pre- and post-petition periods.10 Following the BAP’s and Judge Karlin’s
decisions in In re Westby, I instead held that any apportionment of the EIC
that resulted in part of it being subject to turnover improperly burdened the §
60-2315 exemption.11 I further held in Roy that deducting a debtor’s attorney
fee assignment from the entire refund (including the EIC portion) before
apportioning it between the pre- and post-petition periods is proper. There, the
debtor made a consensual assignment of the refund. Nothing in § 60-2315
prevents a debtor from waiving his or her EIC exemption by assigning it.12 The

9 See In re Hunter, No. 09-12270, 2011 WL 1749933 at *5 (Bankr. D. Kan. May
5, 2011).
10 In re Roy, No. 12-11246, Dkt. 39 at pp. 10, 13. See also In re Westby, 486

B.R. 409 (10th Cir. B.A.P. 2013).
11 Roy, supra at 10.
12 Id. at pp. 13-14.
Case 13-13038 Doc# 81 Filed 03/06/15 Page 6 of 9

trustee relies on that statement in Roy to advocate that the debtor’s exempt
EIC portion of the refund should bear a ratable share of his or her attorney’s
fees assignment. I disagree with both parties.

In Roy, I first deducted the fee assignment (after allocating it between
the state and federal refunds) from each refund and then deducted the EIC
from each, granting the trustee’s turnover application for the estate’s
apportioned share of the remainder of each.13 Because the tax-based portion of
the Roy refund was considerably larger than the EIC portion, no part of the
debtors’ EIC was affected by the attorney’s fee assignment. That will not
necessarily occur in every case. Here, for example, the Stewarts’ EIC portion,
$6,044, is significantly larger than the tax-based portion of their federal
refund, $1,888, and all but $36 of their gross state refund is comprised of EIC.
And, it is certainly possible that other debtors will have no tax-based refund,
but still receive a substantial EIC refund. Whatever the case, however, the
same principles upon which I decided Hunter and Roy apply.

The debtor may, in all cases, assign some or all of his or her prepetition
income tax refund to the debtors’ lawyer as a fee for work done preparing the
bankruptcy case. This assignment is, as I have stated in other cases, not much
different than debtors paying their lawyers a retainer from cash they have on
hand prepetition.14 The end result is that the attorney, not the estate, gets the

13 Id. at p. 14.
14 In re Hunter, 2011 WL 1749933 at *5 and *7.

Case 13-13038 Doc# 81 Filed 03/06/15 Page 7 of 9

money. A debtor’s consensual tax refund assignment for fees and expenses that
impairs the EIC portion of their refund is also entirely consistent with Kansas
exemption law. Therefore I refuse to hold that an EIC refund can never be
impaired by an attorney’s fee assignment. I likewise decline to impose the
proration scheme advocated by the trustee.

For better or worse, the Legislature has made a debtor’s EIC-based tax
refund exempt. Long-standing bankruptcy court authority and years of
practice and custom have allowed debtors to assign their income tax refunds
to their bankruptcy lawyers for fees and expenses. Nothing prevents the
exempt portions from being consensually assigned, therefore nothing should
prevent the deductions of both the EIC and the fees from the entire refund
before applying the Barowsky apportionment of it between the pre- and post-
petition year. This method is simple, straightforward, and consistent with
Kansas and federal bankruptcy law and practice.

Therefore, the appropriate calculation of the estate’s share of the
debtors’ 2013 tax refunds is as follows:

Federal State
Gross Refund 7932.00 1063.00
Less: KDCF Support Setoff 34.75 884.73
Net Refund 7897.25 178.27

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Less: Attorney Fee/Filing Fee Assignment ($1,481) proratedbetween federal and state refunds15
1305.95 175.05
Less: EIC exempt portion of refund 6044.00 1027.00
Net Refund Available for Turnover before Barowsky allocation 547.30 0.00
Estate’s share of Refund (330/365 = .90410) 494.81 0.00

As this calculation demonstrates, because nearly all of the gross state refund
is EIC-based, the fee assignment burdens the EIC portion and no remainder
subject to turnover exists; but a remainder of the federal tax refund in excess
of the fee assignment and EIC portion exists and is subject to turnover. The
trustee’s motion for turnover is granted in part and debtors are ordered to
turnover $494.81 to the trustee, together with the $200 sanction previously
ordered by this Court.16

# # #

15 The federal refund comprises 88.18% of the total gross refund ($7,932 ÷
$8,995); the state refund comprises 11.82% of the total gross refund ($1,063 ÷
16 Dkt. 47.

Case 13-13038 Doc# 81 Filed 03/06/15 Page 9 of 9

14-05193 Ledin v. Thompson et al (Doc. # 52)

Ledin v. Thompson et al, 14-05193 (Bankr. D. Kan. Feb. 10, 2015) Doc. # 52

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SIGNED this 10th day of February, 2015.




JONATHAN EDWARD LEDIN, ) Case No. 14-12347
) Chapter 7

 Debtor. )
Plaintiff, )

 ) Adv. No. 14-5193
vs. )

Defendants. )



Case 14-05193 Doc# 52 Filed 02/10/15 Page 1 of 17

The Bankruptcy Code contains two provisions that protect debtors from
collection activity during a case and shield certain exempt assets from administration
as part of the debtor’s bankruptcy estate. 11 U.S.C. § 362(a) stays collection activity
during a case and § 522(d)(10) exempts social security and other government
payments from the reach of the trustee. Neither takes effect unless and until a debtor
actually files a bankruptcy case, though, and, except in limited circumstances, neither
forms the basis for an independent cause of action. The same is true for the provisions
of the Code of Federal Regulations found at 31 C.F.R. §§ 212.6 and 212.7 that govern
how financial institutions respond to garnishments of accounts that may contain
social security or other government payments. Nor do “violations” of procedural
statutes and court rules -- KAN. STAT. ANN. § 60-211(a) and KAN. S. CT. RULE 170(d)

- create independent, substantive claims.
FinanceCo of Kansas took a deficiency judgment on a defaulted car loan owed
by debtor Jonathan Ledin sometime in 2008. In 2013, FinanceCo transcribed that
judgment on the Chapter 60 appearance docket of the Reno County District Court
and, in June of 2014, garnished Ledin’s savings accounts at Commerce Bank. Ledin
replied, claiming that the accounts contained funds traceable to social security
payments, but the Reno County court concluded that the funds were not exempt,
granting judgment and entering a pay order on the garnishment. In September of
2014, FinanceCo garnished Ledin’s checking account at Commerce. This time, Ledin
replied, additionally claiming that he was in the process of preparing a bankruptcy
filing. The state court allowed that garnishment as well, after conducting a hearing

Case 14-05193 Doc# 52 Filed 02/10/15 Page 2 of 17

on Ledin’s objection. Ledin then filed the present chapter 7 case here on October 14,
2014. He filed this adversary proceeding against judgment creditor FinanceCo, its
counsel Richard Thompson, garnishee Commerce Bank, and its Hutchinson branch
manager, Amy White, seeking over a million dollars in damages (the garnishments
netted $1,066) and demanding a jury trial. All four defendants move to dismiss the
complaint as failing to state a claim for relief under Rule 12(b)(6).1

Ledin’s claims for damages under §§ 362(a) and 522(d)(10) fail because he was
not a debtor in bankruptcy when either of the garnishments occurred and because
neither of those sections support a private right of action under the circumstances
that he alleges. His tort claims under the “CFRs” fail because those regulations also
do not supply a right of private action and because the facts alleged in the complaint
do not support a plausible claim for relief. KAN. STAT. ANN. § 60-211(a) and KAN. S.
CT. RULE 170(d) are state procedural rules that do not give rise to causes of action.
Finally, Ledin’s remedy in the state garnishment case was to timely appeal the Reno
County court’s orders after the garnishment hearings instead of seeking collateral
relief from those final orders in this Court in the form of a wrongful garnishment
lawsuit. The complaint should therefore be dismissed.2

Rule 12(b)(6) Standards

1 Fed. R. Civ. P. 12(b)(6), as made applicable to adversary proceedings by Fed. R. Bankr. P.
7012. See Adv. Dkt. 26 (Motion to Dismiss of defendants FinanceCo of Kansas, Inc. and
Richard Thompson); Adv. Dkt. 32 (Motion to Dismiss of defendants Commerce Bank and Amy
2 Plaintiff Jonathan Ledin appears pro se. Defendants Commerce Bank and Amy White
appear by their attorney Jack C. Marvin. Defendants FinanceCo of Kansas, Inc. and RichardThompson appear by their attorney Samantha M.H. Woods.

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In determining whether Ledin’s complaint states a claim upon which relief
may be granted, I assess whether these factual allegations give rise to a cause of
action against defendants for violation of the statutes and regulations alleged. The
question is whether the complaint contains facts sufficient to support these claims,
not whether Ledin will ultimately prevail on those claims.3 The plaintiff must allege
enough facts to support a claim that is plausible on its face.4 The plausibility standard
is less than a probability but more than a sheer possibility that Ledin is entitled to
the relief requested.5 For purposes of this motion, I take the facts pled in the
complaint as true.6

The Claims

Ledin seeks cumulative damages in excess of $1.1 million dollars against the
defendants for violation of the exemption statute, 11 U.S.C. § 522(d)(10)(A) [Count I];
violation of certain federal banking regulations dealing with garnishment of accounts
containing direct deposit federal benefit payments, 31 C.F.R. §§ 212.6 and 212.7
[Counts II and III]; violation of the automatic stay, 11 U.S.C. § 362; violation of KAN.
STAT. ANN. § 60-211(a) (2013 Supp.) for failure to sign unspecified court documents;

3 Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (In ruling on a motion to dismiss
the judge must accept all allegations as true and may not dismiss on the basis that it appears
unlikely the allegations can be proven.).
4 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007) (enough facts must be alleged to
nudge the claim across the line from conceivable to plausible).
5 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
6 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (In reviewing
the sufficiency of the complaint, the court assumes the truth of the plaintiff’s well-pleaded
factual allegations and views them in the light most favorable to the plaintiff.); Mobley v.
McCormick, 40 F.3d 337, 340 (10th Cir. 1994) (A Rule 12(b)(6) motion tests the sufficiency of
the allegations within the four corners of the complaint after accepting as true all well-
pleaded factual allegations.).

Case 14-05193 Doc# 52 Filed 02/10/15 Page 4 of 17

and violation of KAN. S. CT. RULE 170(d)(2) for failure to make reasonable effort to
resolve Ledin’s objections to proposed orders submitted to the state court regarding
the garnishments.7 These claims arise from two prepetition state court garnishments
that attached a total of $1,066.15 in funds from Ledin’s savings and checking accounts
at Commerce Bank which he claimed were exempt social security disability benefits.
Ledin demands a jury trial on all claims – claims that he characterizes as actions in

Summary of Facts Pled in Complaint8

FinanceCo obtained a chapter 61 state court limited actions judgment in the
amount of $6,023 against Ledin sometime in 2008. FinanceCo transcribed its limited
actions judgment to Reno County District Court sometime in November 2013, thus
imposing a chapter 60 judgment lien on Ledin’s real property in the county where
recorded.9 Ledin does not dispute the validity of FinanceCo’s underlying judgment.

In early September 2013 Ledin opened a checking account and two savings
accounts at Commerce Bank. Initially, his monthly social security disability benefit
check of $1,323 was directly deposited in the checking account. He would then
withdraw $100 cash from the checking account each month and deposit $50 in each

7 Ledin asserts the exemption and “CFR” claims against all defendants. He asserts the stay
violation against FinanceCo and Thompson, and the remaining § 60-211(a) and Rule 170(d)
claims against Thompson only.
8 These facts are common to all of the claims alleged. None of the pleadings, orders, or
documents pertaining to the subject garnishments were attached to Ledin’s complaint.
9 See KAN. STAT. ANN. § 60-2418(a) and § 60-2202(b). Upon transcribing the limited actions
judgment (Case No. 09 LM 0731) to a code of civil procedure chapter 60 judgment (Case No.
14 CV 2) and recording it, execution to satisfy the judgment proceeds in the same fashion as
though it were an original chapter 60 judgment.

Case 14-05193 Doc# 52 Filed 02/10/15 Page 5 of 17

savings account. Ledin characterizes the savings accounts as his “emergency fund”
and says he opened them because of Commerce Bank’s Rewards program.

On June 12, 2014, FinanceCo garnished Ledin’s savings accounts at Commerce
and attached $688.05. This garnishment depleted both savings accounts. Ledin
asserted that the funds were exempt as his social security disability benefit. Ms.
White told Ledin that his disability benefit was not protected from garnishment once
he transferred the funds out of his checking account to his savings account. It is
unclear from the face of the complaint whether Ledin requested a court hearing to
assert his claim of exemption or otherwise filed a reply contesting the garnishee’s
answer as provided by Kansas garnishment procedures.10 In any event, the state
court apparently rejected Ledin’s claim of exemption of the garnished funds leading
to this complaint.11

In July or August of 2014 Ledin changed the direct deposit method for his social
security disability benefit. Instead of the funds being directly deposited to his bank
account, the monthly benefit was now transferred to a stored value card called a
Direct Express® Debit Card – apparently available to certain federal benefit program
recipients. Ledin would take a cash advance from the Debit Card and deposit it in his
checking account to supplement his “emergency fund.”

On or about September 9, 2014, FinanceCo garnished Ledin’s checking account

10 See KAN. STAT. ANN. §§ 60-735(b) and 60-738.
11 In other pleadings that Ledin filed in this adversary proceeding, he attached some of the
documents pertaining to the June 2014 garnishment, including a copy of the state court’s
Order to Pay Money to Judgment Creditor entered August 14, 2014. See Adv. Dkt. 42-1, p.

Case 14-05193 Doc# 52 Filed 02/10/15 Page 6 of 17

and attached $378.10, causing the account to be overdrawn. On or about September
12, 2014, Ledin “contested” this garnishment by submitting an affidavit claiming the
funds protected as social security disability income and stating that he “intends to
file for Chapter 7 Bankruptcy . . . .” The affidavit was not attached to Ledin’s
adversary complaint, but was attached to his “response” to the Motion to Dismiss.12
Reno County District Court Judge Chambers conducted a hearing on the second
garnishment on September 29, 2014. Nothing in the pleadings tells me what
happened at that hearing.

After Commerce closed Ledin’s bank accounts on October 10, 2014, he filed his
bankruptcy petition on October 14, 2014 and commenced this adversary proceeding
on November 17, 2014.


1. The Exemption Claim under § 522(d)(10)(A)
Ledin alleges that the defendants “violated” § 522(d)(10)(A), the Bankruptcy
Code provision that allows bankruptcy debtors to claim exempt the right to receive a
“social security benefit.” Section 522(d) lists the so-called federal exemptions in
bankruptcy. Because Kansas has opted out of the federal exemption scheme Kansas
bankruptcy debtors must generally use the state law exemptions, but KAN. STAT.
ANN. § 60-2312(b), expressly authorizes an “individual debtor under the federal
bankruptcy reform act” to claim the § 522(d)(10)(A) federal exemption in addition to

12 See Adv. Dkt. 31, pp. 15-16.

Case 14-05193 Doc# 52 Filed 02/10/15 Page 7 of 17

the state law exemptions.13 In order to claim the §60-2312(b)/§522(d)(10) exemption,
the claimant must be a debtor in bankruptcy.

When he contested the state court garnishment proceedings, Ledin claimed
that his Social Security disability benefit was exempt. A person’s future right to the
payment of Social Security benefits is generally exempt from execution under 42

U.S.C. § 407(a). Ledin has not alleged that any of the defendants sought to garnish
his benefits in the hands of the Government or that they sought to execute on his
future right to claim them. The state court, not the defendants, determined that the
garnished funds—cash that he withdrew from his checking account and deposited
into his savings account—were not in any way exempt. Section 522(d)(10) did not
apply to Ledin when this determination was made because he was not yet in
bankruptcy. Even if there were a private right of action under § 522(d)(10)(A), the
state court garnishment proceedings occurred before Ledin filed his bankruptcy case,
rendering § 522 of the Bankruptcy Code inapplicable to those proceedings. Finally,
as the defendants note, there is no private cause of action in tort for damages in § 522
when a court disallows an exemption claim – inside or outside of a bankruptcy case.14
Ledin’s damage claim for “violating” this exemption statute fails to state a claim upon
which relief may be granted.
2. Violation of Federal Regulations, 31 C.F.R. §§ 212.6 and 212.7
Ledin also seeks damages for defendants’ withholding or freezing funds as the
13 KAN. STAT. ANN. § 60-2312(a) (2005).
14 See Adv. Dkt. 33, p. 5. Adv. Dkt. 27, pp. 5-6.

Case 14-05193 Doc# 52 Filed 02/10/15 Page 8 of 17

state court garnishment order directed. Part 212 of Title 31 of the Code of Federal
Regulations, adopted in 2011, deals with garnishment of accounts containing federal
benefit payments. Its purpose is to protect federal benefits from garnishment by
establishing procedures for financial institutions when served with a garnishment
order against an account holder “into whose account a [protected] Federal benefit
payment has been directly deposited.”15 It applies to financial institutions as defined
in § 212.3, not their individual officers or employees. That alone protects defendant
White from liability here.16 The regulations require that a financial institution, as
garnishee, conduct an account review and follow certain procedures when served with
a garnishment order.17 Section 212.3 defines a “[f]inancial institution” as “a bank,
savings association, credit union, or other entity chartered under
Federal or State law to engage in the business of banking.” Ledin does not allege that
defendants FinanceCo or Thompson are financial institutions within the meaning of
§ 212.3. As with his claims against defendant White, this kills Ledin’s alleged claim
against FinanceCo and Thompson for violating the garnishment regulations.
Thompson is an individual engaged in the practice of law, not a financial institution
or other entity engaged in banking. There is no allegation that FinanceCo is an entity
chartered to engage in the business of banking. Because the judgment creditor and
its attorney are not financial institutions and were not served with an order of
garnishment, they are not subject to these regulations, are not obligated to conduct

15 31 C.F.R. § 212.1 (2011). Emphasis added.
16 31 C.F.R. § 212.2.
17 31 C.F.R. § 212.2, § 212.3 (defining an “account review”); § 212.5.

Case 14-05193 Doc# 52 Filed 02/10/15 Page 9 of 17

an “account review,” and are not obligated to adhere to the procedures enumerated
in Part 212. The regulations govern a financial institution who is served with an order
of garnishment on its depositor’s accounts and as garnishee must evaluate whether
the garnishment seeks to attach protected federal benefit payments. Ledin’s
complaint fails to state a claim for damages against White, FinanceCo, and Thompson
for violation of 31 C.F.R. §§ 212.6 and 212.7.18

Commerce is a financial institution under the regulations. A “benefit payment”
is specifically defined as one that is paid electronically by direct deposit to the account
and contains certain encoded characters in the record of the direct deposit entry.19 In
general, when a financial institution receives a garnishment order, it must review
the transactions over the preceding 2 months in any account held by the judgment
debtor to determine whether a benefit payment was deposited into the account by a
benefit agency in that time and determine what the “protected amount” of the account
is. That “protected amount” as determined by the financial institution is “conclusively
considered to be exempt from garnishment under law.”20 If a benefit payment was
electronically deposited, a protected amount established, and funds exist in excess of
the protected amount, the financial institution is required to send notice to the
account holder.21 If there was no benefit payment deposited during the look back
period, the financial institution is not required to give notice. While § 212.10 of the

18 31 C.F.R. § 212.2.
19 31 C.F.R. § 212.3.
20 See §§ 212.3, 212.5, 212.6.
21 Section 212.7.

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regulations provide a safe harbor against both the judgment creditor and the account
holder to financial institutions that act in good faith, Part 212 does not create or
expressly authorize a private cause of action by an account holder against the
financial institution. Even if they did, Ledin’s complaint fails to state a claim against

On its face, Ledin’s complaint does not state a claim for relief with respect to
the first garnishment. The garnishment order applied to Ledin’s savings accounts –
accounts that Ledin says contained funds from cash deposits, not electronic direct
deposits. He alleges that he took cash withdrawals from his checking account and
deposited them into his savings accounts.22 He does not allege that any direct deposits
of social security payments were made electronically to his savings accounts by a
benefit agency. Thus, the savings account did not contain a “benefit payment” as
defined in § 212.3 and the federal regulations do not apply.

Nor were the funds caught by the second garnishment protected. Ledin says
he took a cash advance from his Direct Express Debit Card that he then deposited in
his checking account. He does not allege that the second garnishment attached a
“benefit payment” made by a “benefit agency.” This part of Ledin’s complaint fails to
state a claim for relief against Commerce.23 Because no benefit payments as defined
in § 212.3 were deposited by a benefit agency, Commerce was not obligated to comply

22 Only electronic deposits made by a “benefit agency” are protected from garnishment. See §

212.3 and § 212.5(b) and (c).
23 See § 212.3 which defines a “benefit agency” as the Social Security Administration and
requires the “benefit payment” to be paid by direct deposit electronically into the account
holder’s account.
Case 14-05193 Doc# 52 Filed 02/10/15 Page 11 of 17

with the procedures in the regulations nor provide the notice referenced in § 212.6(e)

and § 212.7 to Ledin.24 The “CFR” claim against Commerce must be dismissed for

failure to state a claim.

3. Alleged Stay Violation, 11 U.S.C. § 362
Ledin alleges that FinanceCo and Thompson violated the automatic stay by

requesting garnishment orders in June and September of 2014. Specifically, he

alleges in the complaint that FinanceCo:

 . . . did intentionally and illegally obtain a Court Order to garnish
Plaintiff’s savings and checking account for a total of $1,066.15 with
the intention, knowledge and purpose of harming Plaintiff by
attempting to collect, assess, or recover on a claim for a debt; a
deficiency judgment that increased to the amount of $15,551.47,
from a court hearing held . . . on September 29, 2014 in violation of
11 U.S.C. § 361(a)(1), (2), and (6), of the automatic stay. . . .
FinanceCo . . . had knowledge that Plaintiff was preparing to file for
bankruptcy Chapter 7 protection through said Affidavit mentioned
in paragraph 22. Defendant FinanceCo . . . is therefore liable in tort
to Plaintiff for violation of: (1) 11 U.S.C. § 362(a)(1), (2), and (6), of
the automatic stay . . .25

The referenced paragraph 22 provides:

Plaintiff submitted an Affidavit signed September 12, 2014 to the
trial court, in Ref: Case No. 14 CV 2 that he was filing for
bankruptcy Chapter 7. Defendant FinanceCo . . . continued to
conduct the hearing held on September 29, 2014 in Division II, the
Honorable Judge Timothy Chambers presiding.26

Like allegations are made against defendant Thompson, including that Thompson

24 See 31 C.F.R. § 212.5(b) (where no benefit payment is deposited during the look back
period, the financial institution is not required to follow the procedures in § 212.6); § 212.6
(the provisions of § 212.6 apply only if an account review shows that “a benefit agency
deposited a benefit payment into an account during the look back period.”).
25 Adv. Dkt. 1, ¶ 26.
26 Id. at ¶ 22.

Case 14-05193 Doc# 52 Filed 02/10/15 Page 12 of 17

knew “Plaintiff was preparing to file for bankruptcy . . . .”27 Ledin did not file his
chapter 7 case here until October and this alone is fatal to his stay violation claim.

The sum of the stay violations alleged against FinanceCo and Thompson are
that (1) they obtained garnishment orders which were issued and served on
approximately June 12, 2014 and September 9, 2014;28 and (2) that they continued
forward with a hearing on September 29, 2014 despite knowing that Ledin was
preparing to file bankruptcy. These allegations do not state a claim for relief because
the automatic stay was not in effect at any point during this timeframe.

The automatic stay is triggered by the filing of a bankruptcy petition.29 Section
362(a) provides that: “. . . a petition filed under section 301, 302, or 303 of this title .
. . operates as a stay, applicable to all entities . . .” Intent to file bankruptcy in the
future does not trigger the automatic stay.30 Ledin did not file his bankruptcy petition
until October 14, 2014. Thus, no stay was in effect during the complained-of conduct
that can possibly give rise to a violation of the automatic stay. Ledin’s affidavit
submitted on September 12, 2014 in response to the second garnishment and to
apparently halt the September 29 hearing did not cause the stay to go into effect.

Because Ledin has not alleged the commencement or continuation of any
garnishment activity or proceedings by FinanceCo or Thompson after October 14,
2014, he has failed to state a claim for violation of the automatic stay under 11 U.S.C.

27 Id. at ¶ 40
28 Id. at ¶s 20-21.
29 In re Calder, 907 F.2d 953, 956 (10th Cir. 1990).
30 In re Nelson, 335 B.R. 740, 749 (Bankr. D. Kan. 2004). See also In re Bush, 169 B.R. 34

(W.D. Va. 1994).
Case 14-05193 Doc# 52 Filed 02/10/15 Page 13 of 17

§ 362(a).

4. Failing to Sign Orders and Court Documents, KAN. STAT. ANN. § 60-211(a)
Ledin vaguely alleges that Thompson is liable in tort for “fail[ing] to sign court
documents related to the Court Order of garnishment” with the intention of harming
him in violation of § 60-211.31 As a consequence, he asserts that all “Orders,
Judgments and Garnishment Orders” signed by the state court trial judge since 2009
are null and void.32 He also alleges that Thompson failed on three occasions to sign
proposed Orders submitted to the state trial court under Kansas Supreme Court Rule
170(d)(2), rendering him liable for violation of § 60-211.33 These allegations are the
sum total of Ledin’s attempt to state a cause of action under § 60-211.

Section 60-211(a) (2013 Supp.) of the Kansas Code of Civil Procedure provides:

(a) Signature. Every pleading, written motion, and other paper must
be signed by at least one attorney of record in the attorney’s name,
or by a party personally if the party is unrepresented. The paper
must state the signer’s address, e-mail address, telephone numberand fax number. Unless a rule or statute specifically states
otherwise, a pleading need not be verified or accompanied by anaffidavit or a declaration pursuant to K.S.A. 53-601, andamendments thereto. The court must strike an unsigned paperunless the omission is promptly corrected after being called to the
attorney’s or party’s attention.
Ledin makes no effort to identify the specific pleadings, motions, or papers that

Thompson failed to sign. His complaint is that Thompson did not sign Orders,

Judgments, and Garnishment Orders, all of which were entered by judges and which

31 Adv. Dkt. 1, ¶s 41-44
32 Id. at ¶ 44.
33 Id. at ¶ 46.

Case 14-05193 Doc# 52 Filed 02/10/15 Page 14 of 17

attorneys are not necessarily required to sign. Section 60-211(a) does not support a
private cause of action in tort. This is a procedural, not substantive provision.34 The
more commonly invoked provisions (not pled by Ledin here), § 60-211(b) and (c),
supply a basis for courts to sanction lawyers and parties who file frivolous or false
pleadings. Ledin’s allegation of noncompliance with subsection (a) that merely
parrots the language of the statute is not sufficient to show that there are facts that
support a plausible claim for relief.35 Nothing alleged here shows that Ledin is
entitled to relief. The alleged violation of § 60-211(a) does not state a claim for relief
against Thompson and must be dismissed.

5. Failing to Comply with KAN. S. CT. RULE 170(d)(2)
Ledin claims that Thompson failed to comply with KAN. S. CT. RULE 170(d)(2),
a procedural rule governing proceedings in Kansas district courts (state trial courts)
titled “Preparation of Order” and that he should be answerable in damages. Rule 170
specifies the procedure for memorializing a court’s order when a state trial court
directs that it be prepared by a party. If the opposing party objects to the order, the
parties are to attempt to resolve the dispute before submitting the order to the court
to settle. Ledin says that on three occasions, Thompson failed to make a reasonable
effort to resolve Ledin’s objections to proposed orders submitted to the state trial

34 See Christenson Media Group, Inc. v. Lang Industries, Inc., 782 F. Supp. 2d 1213, 1221 (D.
Kan. 2011) (an unsigned pleading is a technical defect that does not affect the substantial
rights of the adverse party under § 60-211).
35 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed. 2d 929 (2007) (Plaintiff
must plead the grounds of his entitlement to relief with more than labels and conclusions or formulaic
recitation of the elements of a cause of action).

Case 14-05193 Doc# 52 Filed 02/10/15 Page 15 of 17

court.36 He does not allege any facts concerning the efforts attempted or the nature
of the objections. He does not even identify the proposed orders.
Rule 170(d)(2) and (3) provide:

(d)(2) If there is an objection, the parties must make a reasonable
effort to confer to resolve the objection and, if agreement is reached,
the drafter must submit the agreed journal entry to the court for
approval. A “reasonable effort to confer” requires more than sending
a communication to the opposing party. It requires that the parties
in good faith converse, compare views, and deliberate, or in good
faith attempt to do so.

(d)(3) If – after reasonable effort to confer – the parties have not
agreed on the terms of the order, the drafter must submit the
original draft and the objection to the court and the court mustsettle the order, with or without a hearing.

This purported claim against Thompson fails for the same reasons as Ledin’s claim
under § 60-211(a). No right to tort damages arises from the parties’ inability to resolve
an objection to a proposed order or a party’s noncompliance with the procedure for
drafting and submitting orders to the state trial court. Ledin’s allegation, pled solely
in paragraph 45 of the complaint, fails to state a claim for relief and must be

6. Lack of Subject Matter Jurisdiction
Ledin’s complaint is really no more than a collateral attack on a state court’s
final order. Ledin should have (and apparently did) raise his exemption claim in reply
to both FinanceCo garnishments as KAN. STAT. ANN. §§ 60-735(b) and 60-738(a) (2013
Supp.) allow.37 When the judgment debtor replies, objecting to the requested

36 Adv. Dkt. 1, ¶ 45.
37 See Adv. Dkt. 31, pp. 15-16 (Affidavit submitted in reply to September garnishment).

Case 14-05193 Doc# 52 Filed 02/10/15 Page 16 of 17

garnishment, the state court holds a hearing at which the objecting party bears the
burden of proving a claimed exemption and the facts alleged in his objection.38 Ledin
did that and lost; his remedy was to appeal that final order to the Kansas Court of
Appeals.39 When he didn’t, the garnishment order and order to pay became final.
This Court must give those orders full faith and credit. Even if an independent action
were proper under the circumstances, a wrongful garnishment action based upon a
prepetition garnishment proceeding would properly lie within the jurisdiction of the
state court, not the bankruptcy court, particularly where the garnished funds are
claimed exempt and not property of the bankruptcy estate. Moreover, such a cause of
action would be property of Ledin’s bankruptcy estate and the only proper party
plaintiff would be, in the first instance, the chapter 7 trustee. This Court is simply
without jurisdiction to grant the relief Ledin seeks.


For all of the foregoing reasons, Ledin’s complaint fails to state a claim for
relief against defendants Commerce Bank, Amy White, FinanceCo of Kansas, Inc.,
and Richard Thompson. The defendants’ motions are granted; the complaint is
dismissed. A judgment on decision shall issue this day.

# # #

38 See KAN. STAT. ANN. § 60-735(c) and § 60-738(b).
39 See e.g., LSF Franchise REO I v. Emporia Restaurants, Inc., 283 Kan. 13, 152 P.3d 34
(2007) (after judgment debtor successfully quashed garnishment of bank accounts, judgment
creditor appealed).

Case 14-05193 Doc# 52 Filed 02/10/15 Page 17 of 17

14-05002 Morris v. Ark Valley Credit Union et al (Doc. # 57)

Morris v. Ark Valley Credit Union et al, 14-05002 (Bankr. D. Kan. Jan. 7, 2015) Doc. # 57

PDFClick here for the pdf document.

SIGNED this 6th day of January, 2015.




IN RE: )
JEFFREY KENT GRACY, ) Case No. 13-11917
) Chapter 7

Debtor. )

Plaintiff, )
vs. ) Adv. No. 14-5002

Defendants. )


When Jeffrey Gracy took two home equity loans from Ark Valley Credit Union,

he signed mortgages that described the real estate upon which he lives, along with


Case 14-05002 Doc# 57 Filed 01/06/15 Page 1 of 16

any improvements and fixtures. He intended to grant and Ark Valley intended to
take liens in his land as well as his residence, a manufactured home. Neither he nor
Ark Valley took measures to eliminate the certificate of title on his manufactured
home, allowing it to remain personal property that is subject to the Uniform
Commercial Code and, specifically, Article 9. An Article 9 security interest only
attaches when, among other things, the security agreement reasonably identifies the

In this case, the trustee seeks to avoid an alleged unperfected lien in a
manufactured home by virtue of a mortgage that describes the lender’s security as
both the debtor’s real property and any “fixtures” upon the property. Mortgages can
be “security agreements” if they satisfy the three requirements of KAN. STAT. ANN. §
84-9-203 (2013 Supp.), but when the transaction is a “consumer transaction” that
involves “consumer goods,” § 84-9-108(e)(2) renders a generic collateral description
by UCC type insufficient as a matter of law.

As discussed below, Gracy’s home equity lines of credit from Ark Valley Credit
Union were consumer transactions and the manufactured home—his residence—is a
consumer good. The liens that Ark Valley sought never attached to the manufactured
home leaving the trustee nothing to avoid.1

Findings of Fact

In the mid-1990’s debtor Jeff Gracy bought the land commonly described as

1 The trustee J. Michael Morris appeared in person. Ark Valley Credit Union appeared by its counsel
Eric Bruce. The debtor Jeffrey Gracy appeared as a witness at trial, but is in default of answering thecomplaint and the trustee obtained a default judgment against Gracy. Adv. Dkt. 20 (Ex. 10).

Case 14-05002 Doc# 57 Filed 01/06/15 Page 2 of 16

617 W. Avenue G in Caldwell, Kansas and moved a new 1994 Fuqua manufactured
home that he had purchased from his father-in-law onto the property. Mr. Gracy and
his wife lived there; she has since passed, but he continued to live there. He paid off
the manufactured home’s purchase money loan in 2007, leaving it free and clear of
liens at the time of the subsequent transactions with Ark Valley that are the subject
of this proceeding.2 While the title to the home was never transferred to Mr. Gracy of
record, he located the certificate of title among papers in his home after this case was
filed. Neither party offered it in evidence. Kansas law permits manufactured
homeowners or lienholders to “eliminate” certificates of title, thus changing the
character of the manufactured home from personal property to an improvement to
the real estate.3 That was not done in this case.

In January of 2009, Mr. Gracy borrowed $21,000 from Ark Valley Credit Union
on a home equity line of credit to refinance what he described as personal bills or
expenses.4 The line of credit was secured by a 15-year Revolving Credit Mortgage
granted on the Caldwell property. It provides:

TO SECURE to Lender:

(1) The repayment of all indebtedness due and to become due under
the terms and conditions of the . . . Credit Agreement . . .
(2) The payment of all other sums advanced
. . . to protect the
security of this Mortgage . . .
(3) The performance of Borrower’s covenants and agreements of
Borrower herein contained;
BORROWER does hereby mortgage, grant and convey to Lender the

2 The purchase money lender, Green Tree Financial Corp., never released the lien of record, see Exhibit

3 See KAN. STAT. ANN. § 58-4214 (2005).
4 The credit agreement – a LOANLINER Home Equity Plan Credit Agreement and Truth-in-Lending
Disclosures – referenced in the mortgage instrument was not offered into evidence at trial.
Case 14-05002 Doc# 57 Filed 01/06/15 Page 3 of 16

following described property located in the County of Sumner, Stateof Kansas:

Lots 32, 34, 36, and 38, Block 85, New Caldwell Addition, City ofCaldwell, Sumner County, Kansas which has the address of 617 W.
Ave. G, Caldwell, Kansas 67022 (herein “Property Address”);

TOGETHER with all the improvements now or hereafter erected
on the property, and all easements, rights, appurtenances and
fixtures, all of which shall be deemed to be and remain a part of the
property covered by this Mortgage; . . . .5

No reference was made in the mortgage to the manufactured home located on the

A year later, on January 19, 2010 Mr. Gracy obtained a second line of credit
from Ark Valley in the amount of $26,000 and executed another Revolving Credit
Mortgage on an identical form to secure repayment of the indebtedness. He used this
money to build a detached garage on the property.6 The 2010 mortgage had a 20-year
term but the collateral description was identical to that on the 2009 Revolving Credit
Mortgage as were the granting and habendum clauses. The 2010 mortgage also made
no reference to a manufactured home being located on the realty.

Mr. Gracy thinks that the Ark Valley lending officer knew the described
property was his “home,” but testified that there was no discussion of it being a
manufactured home. When he executed the mortgages, he believed that he had
granted a lien on his land, the manufactured home, and the detached garage. Mr.
Gracy did not recall any specific discussion with Ark Valley about the mortgage form

5 Ex. B, emphasis added.
6 Ex. E.

Case 14-05002 Doc# 57 Filed 01/06/15 Page 4 of 16

or its meaning.

Mary Gillette is the retired manager for Ark Valley. She dealt with Mr. Gracy
on these credit transactions. She testified that credit union employees received
training on documenting mobile home loans. In particular, the credit union’s policy
was that manufactured homes offered as security for a home equity loan were
required to be set on a permanent foundation and the home’s certificate of title was
to be eliminated.7 She did not elaborate on what makes a foundation “permanent.”
Ms. Gillette knew there was a “house” on the property and that Gracy lived there, but
she did not know that Gracy’s home was a manufactured home.

The credit union didn’t obtain an appraisal of the property to support either
loan, but it did rely on the 2008 Sumner County real estate tax valuation in making
the 2009 loan.8 According to Ms. Gillette, the credit union could loan up to 70% of the
property’s appraised value - $75,410. Before it made the second loan in 2010, Ark
Valley obtained a title insurance commitment from abstractor Security 1st Title to
make sure no other liens were placed against the real estate.9 Neither the tax
valuation nor the title insurance certificate reference a manufactured home or any
other improvement on the real estate.10 Ms. Gillette also testified that Ark Valley

7 Ms. Gillette was referring to Kansas law that requires elimination of a manufactured home’s
certificate of title to change the character of a home permanently affixed to the land from personalproperty to an improvement to real property. See KAN. STAT. ANN. § 58-4214(a) (2005). Subsection (b)
sets forth the process and requirements of an application to eliminate title.
8 Ex. G.
9 Ex. H.
10 A 2013 two-page printout from the online Sumner County Information System regarding this parcelshows the property’s use is that of a “single family residence (detached).” The second page of theprintout shows the structure as a “detached SFR [single family residence] unit” and the architectural
style is identified as “Mod/MH [modular/manufactured home]” with a crawl space as the basement.
See Ex. 6. There is no evidence, however, that Ark Valley ever referred to Sumner County’s online


Case 14-05002 Doc# 57 Filed 01/06/15 Page 5 of 16

employees were trained to take a mortgage “on everything.” With respect to Mr.
Gracy’s loans, she intended to obtain a lien on the property as a whole, including the

Neither party offered any photographic evidence of how the manufactured
home was set on the ground, leaving me only Mr. Gracy’s testimony on that topic. On
direct examination, he testified that the home was set on “concrete slabs” spaced
every 2-3 feet running the length of the home. On cross-examination, Mr. Gracy
expanded on this description, testifying that the home is set on cement block piers
running the length of the home. Mr. Gracy’s description is consistent with the
existence of concrete footings as opposed to a solid concrete foundation under the
home. It is likely that the piers are set on the concrete slab footings. The home
remains on its chassis and is anchored to the surface with what Mr. Gracy called
metal straps. These straps are stanchions that tie down and provide support for the
home. The manufactured home is skirted with brick, but there is no evidence to
suggest that it is load-bearing. Utility service is connected to the home from
underneath the home. At some point, Mr. Gracy added a concrete patio and steps to
the back side of the mobile home and the detached garage was built on the property
in 2010. The front porch and steps were constructed of wood. At trial, neither party
elicited whether the manufactured home could be removed intact from the real estate.

Gracy filed this chapter 7 bankruptcy on July 25, 2013. He claimed the
property exempt as his homestead.11 On the date of his petition, the combined balance

Information System at the time of making the loans to Gracy.
11 The Court observes that Gracy did not separately schedule the manufactured home as personal

Case 14-05002 Doc# 57 Filed 01/06/15 Page 6 of 16

of the home equity loans was $43,426.12 Gracy continues to make monthly principal
and interest payments of $347 on the Ark Valley debt.

The trustee filed this adversary proceeding to avoid Ark Valley’s alleged lien
in the manufactured home as unperfected under 11 U.S.C. § 544(a) because Ark
Valley’s lien is not indicated on the home’s certificate of title as KAN. STAT. ANN. § 584204
(2013 Supp.) requires. Ark Valley denies that it took a lien in the home, leaving
no lien to be avoided. The Court denied its motion to dismiss for failure to state a
claim on this basis.13

Conclusions of Law

The trustee invokes his § 544(a) lien creditor avoiding powers, requiring the
Court to navigate the intersection of Kansas property law, Kansas’s version of Article
9 of the Uniform Commercial Code, and the Kansas Manufactured Housing Act, KAN.
STAT. ANN. § 58-4201 et seq. (2005 and 2013 Supp.) to determine whether Ark Valley
received enforceable security interests on Gracy’s manufactured home under the
mortgages and whether those security interests were properly perfected. As noted in
my ruling on Ark Valley’s motion to dismiss, the first issue is one of attachment. Only
if the credit union’s liens attached will I need to assess whether the lien was properly

The trustee says that a lien attached to the manufactured home because the
collateral description in the mortgages included the term “fixtures.” He further

property on Schedule B.
12 Ex. 8.
13 Adv. Dkt. 33, 34, and 45 (order).

Case 14-05002 Doc# 57 Filed 01/06/15 Page 7 of 16

asserts that the evidence establishes that the manufactured home was a fixture
under the common law of fixtures because it was permanently affixed to the real

In the face of its own witness’s credible testimony, Ark Valley counters that it
did not intend to create a lien on the manufactured home and, therefore, no lien
attached. It further contends that the manufactured home is personal property, not
a fixture, because the certificate of title was never eliminated as provided under KAN.
STAT. ANN. § 58-4214, and the common law of fixtures is inapplicable under the Tenth
Circuit Bankruptcy Appellate Panel’s decision in In re Thomas.14 Finally, even if the
common law of fixtures applies, Ark Valley submits that the trustee has failed to meet
its burden of proof that the manufactured home is a fixture encumbered by the

Development of the Law on Manufactured Home Secured

Article 9 of the Uniform Commercial Code, codified in Kansas at KAN. STAT.
ANN. § 84-9-101 et seq. (2013 Supp.), governs security interests in personal property
and fixtures.15 Secured transactions involving manufactured homes are governed in
part by Article 9; such homes are generally personal property though they may
become fixtures if they become sufficiently related to real property.16

Section 84-9-203 governs the attachment of a security interest to collateral and
its enforceability, including a security interest in a manufactured home. Subsection

14 362 B.R. 478 (10th Cir. BAP 2007).
15 See § 84-9-109(a)(1) (scope); § 84-9-101, Official UCC Comment 1.
16 § 84-9-102(a)(53) and (54) (defining manufactured homes and manufactured home transactions).

Case 14-05002 Doc# 57 Filed 01/06/15 Page 8 of 16

(b) requires that value be given, that debtor have rights in the collateral, and that the
debtor have authenticated a security agreement that provides a description of the
collateral. No particular form of a security agreement is required; instead the
agreement must create a security interest as defined in § 84-1-201(b)(35).17 A
mortgage may qualify as an authenticated security agreement.18 But if the formal
requisites of § 84-9-203 are met, the Court must satisfy itself that the parties
mutually intended a security interest to attach to the manufactured home,
particularly where, as here, Ark Valley, denies such intention.19
If the attachment criteria are met, we turn to perfection. In most cases, a
security interest is perfected by the filing of a financing statement.20 Section 84-9311(
a)(2) addresses perfection of a security interest in collateral covered by a state
certificate of title statute and generally provides that indicating the security interest
on the certificate of title or otherwise complying with the non-uniform statute’s other
perfection requirements has the effect that filing a financing statement has.21 In the
case of certificate of title property like a manufactured home, filing a financing
statement is unnecessary and ineffective to perfect a security interest.22

Prior to 1991, the state statute governing perfection of a security interest in
manufactured homes or mobile homes was found in the motor vehicle statutes,

17 § 84-9-102(a)(73) (defining a “security agreement”); § 84-1-201(b)(35) (defining “security interest” as
an interest in personal property or fixtures which secures payment or performance of an obligation).
18 See In re Brooks, 452 B.R. 809, 813 (Bankr. D. Kan. 2011).
19 Adv. Dkt. 45, n. 10 at p. 6.
20 § 84-9-310(a).
21 Section 84-9-109(c)(2) provides that Article 9 does not apply to the extent another statute of this
state expressly governs the creation, perfection, priority or enforcement of a security interest.
22 § 84-9-310(b)(3).

Case 14-05002 Doc# 57 Filed 01/06/15 Page 9 of 16

specifically KAN. STAT. ANN. § 8-135(c), because a manufactured home was defined as

a vehicle.23 In 1991, Kansas enacted the Manufactured Housing Act (KMHA), KAN.

STAT. ANN. § 58-4201 et seq. Section 58-4204 is now the certificate of title statute

governing manufactured homes. The method of perfection, however, remained

generally unchanged – notation of the lien on the certificate of title.24 For KMHA

purposes, a manufactured home is deemed to be personal property and § 58-4204 is

the exclusive means of perfecting a security interest in one.25

Section 58-4204(i) of the KMHA addresses perfection of non-purchase money

security interests in a manufactured home after the original certificate of title has

been issued and applies to the Ark Valley transactions. That section provides, in part:

When a person acquires a security agreement on a manufactured home or
mobile home subsequent to the issuance of the original title on such
manufactured home or mobile home, such person shall require the holder
of the certificate of title to surrender the same and sign an application for a
mortgage title in such form as prescribed by the director. Upon such
surrender, the person shall immediately deliver the certificate of title,
application and a fee of $10 to the division. Upon receipt thereof the
division shall issue a new certificate of title, showing the liens or
encumbrances so created, but not more than two liens or encumbrances
may be shown upon a title. The delivery of the certificate of title,
application and fee to the division shall perfect such person's security
interest in the manufactured home or mobile home described in the
certificate of title, as referenced in K.S.A. 84-9-311, and amendments
In 2002, the legislature amended the KMHA to add § 58-4214. This statute

provided a mechanism to convert the legal character of a manufactured home from

23 See Beneficial Finance Co. of Kansas, Inc. v. Schroeder, 12 Kan. App. 2d 150, 737 P.2d 52 (1987),
rev. denied 241 Kan. 838 (1987).
24 See § 58-4204(i) (2013 Supp.) governing a party who acquires a non-purchase money security interest
in a manufactured home after issuance of the original certificate of title on the manufactured home.
25 See § 58-4204(a); In re Jackson, 358 B.R. 412, 416 (Bankr. D. Kan. 2007).
26 § 58-4204(i) (2013 Supp.), emphasis added.

Case 14-05002 Doc# 57 Filed 01/06/15 Page 10 of 16

personal property to “an improvement to real property” for all purposes. 27 There are
two requirements to effect this change: (1) the home must be affixed to a permanent
foundation; and (2) the certificate of title must be eliminated pursuant to § 584214(
b). In short, the KMHA provides that a manufactured home is personal property
unless the certificate of title is eliminated. It remains subject to the provisions of
Article 9, and for purposes of perfection, the certificate of title statute, § 58-4204 until
the title is eliminated. If the requirements of § 58-4214 are satisfied, the
manufactured home is treated as real property to which the lien of valid real estate
mortgage covering the real property attaches.

There is no question in this case that even if Ark Valley’s liens attached to the
manufactured home, they are not perfected. The certificate of title has not been
eliminated, the manufactured home remains personal property, and Ark Valley’s
liens needed to be indicated on the certificate of title to be properly perfected. The
critical inquiry here is whether the mortgages sufficed to create security interests
that attached to the manufactured home at all.


The trustee argues that the mortgages create security interests in the
manufactured home because, notwithstanding the lack of a general or specific

27 The legislative history to HB 2723 (adding § 58-4214 to the KMHA) reflects that the purpose for
enacting an elimination of certificate of title provision was to enable title insurance to be obtained onmanufactured homes placed on permanent foundations. Without the elimination of the mobile hometitle, title insurers viewed the home as personal property and would not insure the transfer of
ownership of manufactured or mobile homes. Kansas’s elimination statute was modeled after similarstatutes in Colorado and Washington. See Minutes of the Senate Committee on Financial Institutions
and Insurance dated March 26, 2002, Hearing on HB 2723 on March 20, 2002 (with attachments and
written testimony); Kansas Summary of Legislation, 2002 Reg. Sess. H.B. 2723 (elimination ofcertificates of title on manufactured homes makes them eligible for title insurance).

Case 14-05002 Doc# 57 Filed 01/06/15 Page 11 of 16

reference to the manufactured home in the mortgages, the habendum clause refers to
“fixtures.” Thus, the trustee reasons, if the evidence shows that the manufactured
home is a fixture, it is sufficiently described so that Article 9 security interests
attached to it by virtue of the mortgages.

Section 84-9-203 governs the requirements for attachment and
enforcement of a security interest in collateral.

A security interest attaches and becomes enforceable upon the satisfaction of
three conditions: (1) value has been given; (2) the debtor has rights in the collateral;
and (3) the debtor has authenticated a security agreement that provides a description
of the collateral. The first two conditions are easily met. Ark Valley gave value to the
debtor in the form of loan proceeds. The debtor has rights in the manufactured home
as, at a minimum, the equitable owner. As for the third requirement, the mortgages
granted by Gracy to Ark Valley qualify as authenticated security agreements because
they “mortgage, grant and convey” an interest in the real property legally described,
together with improvements and fixtures that “secure” the repayment of the
indebtedness under the home equity credit agreements.

But, two questions remain. First, did Gracy and Ark Valley mutually intend to
grant a security interest in the manufactured home located on the real property?
And, second, does the use of the term “fixtures” sufficiently describe the otherwise
unidentified collateral -- the manufactured home?

As to the first question, because Ark Valley denies that it took a security
interest in the manufactured home, we look beyond the technical requirements of §

Case 14-05002 Doc# 57 Filed 01/06/15 Page 12 of 16

84-9-203(b) to determine whether the parties intended to create a security interest in
the manufactured home.28 Mr. Gracy unequivocally testified that Ark Valley knew
his “home” was located on the land and in executing the mortgages he believed he
was granting a lien on his land, the manufactured home, and the detached garage.
The Ark Valley witness largely corroborated Mr. Gracy’s testimony. Ms. Gillette
knew that Gracy lived in a “house” on the described realty but didn’t know that it was
a manufactured home. Gracy and Gillette had no discussion that the “home” or
“house” on the property was a manufactured home. She had been trained to obtain
mortgages “on everything” to secure loans and acknowledged that her intent was to
obtain a mortgage on the property as a whole. All of the evidence suggests that the
parties mutually intended to grant a security interest in the manufactured home.29

The security agreement must describe the collateral in which
a security interest is granted.

The sufficiency of the description of the collateral in a security agreement is
governed by § 84-9-108 which requires that the collateral be reasonably identified.
The purpose of the collateral description is evidentiary, and the test of sufficiency is
“that the description do the job assigned to it: Make possible the identification of the
collateral described.”30 While supergeneric descriptions in security agreements are
prohibited under subsection (c), § 84-9-108(b) generally authorizes describing

28 Adv. Dkt. 45, n.10 at p. 6.
29 Based upon Ms. Gillette’s testimony, she recognized that if the collateral was a manufactured home,
special requirements were necessary for Ark Valley to be properly perfected by the recorded mortgage.
But the inquiry here is not whether Ms. Gillette intended to perfect a security interest in the
manufactured home; the inquiry is whether she, on behalf of Ark Valley, intended to obtain a lien on
Mr. Gracy’s home.
30 See Official UCC Comment 2, § 84-9-108.

Case 14-05002 Doc# 57 Filed 01/06/15 Page 13 of 16

collateral by category or type such as goods, inventory, equipment, accounts, etc.31
The UCC recognizes several categories or types of collateral. Most relevant here,
“goods” are broadly defined in § 84-9-102(a)(44) as all things that are movable at the
time a security interest attaches; “goods” specifically subsumes “fixtures” and
“manufactured homes.” “Fixtures” are also a UCC-defined type of collateral.32
Likewise, “consumer goods” defined in § 84-9-102(a)(23), are “goods” that are used
primarily for personal, family, or household purposes.33 Because Gracy uses his
manufactured home as his residence, it is a “consumer good” and the transactions it
secures are “consumer transactions.”

A more specific description of collateral is required in a
consumer transaction involving consumer goods.

Consumer goods are an exception to the general rule permitting description by
collateral type. Subsection (e)(2) of § 84-9-108 renders descriptions of consumer goods
by collateral type insufficient in consumer transactions; a more specific description is
required.34 Gracy’s home equity loans from Ark Valley are consumer transactions
involving consumer goods. Section 84-9-102(a)(26) defines a consumer transaction as
“a transaction in which (i) an individual incurs an obligation primarily for personal,
family, or household purposes, (ii) a security interest secures the obligation, and (iii)
the collateral is held or acquired primarily for personal, family, or household

31 § 84-9-108(b); See § 84-9-102, Official UCC Comments 3 and 4.
32 § 84-9-102(a)(41).
33 Revised Article 9 retained the four mutually exclusive “types” of goods: inventory, equipment, farm
products and consumer goods. See § 84-9-102, Official UCC Comment 4.
34 In re Cunningham, 489 B.R. 602 (Bankr. D. Kan. 2013) (recognizing rule that property type
descriptions of collateral are not sufficient for consumer goods; a collateral description of “goods
purchased on Account” or “goods purchased with Card” was insufficient to allow attachment and
enforceability of a security interest in the goods purchased).


Case 14-05002 Doc# 57 Filed 01/06/15 Page 14 of 16

purposes. “Consumer-goods transactions” are subsumed under “consumer

Gracy testified that he used the proceeds of the 2009 home equity loan to pay
unspecified personal expenses. He used the proceeds of the 2010 home equity loan to
construct a detached garage on the property. These obligations were incurred for
primarily personal, family, or household purposes. Gracy lives in the manufactured
home–another personal, family, or household use. Therefore, the home equity loans
are consumer transactions as defined in § 84-9-102(a)(26). The manufactured home
is a “good” under § 84-9-102(a)(44) that is also a “consumer good” under § 84-9102(
a)(23). This makes § 84-9-108(e)(2) apply to these lines of credit transactions with
Ark Valley. Therefore, the collateral “type” descriptions in the mortgages are
insufficient to attach security interests in the manufactured home.36 Here, the
collateral is generically described as a fixture, a UCC-defined collateral type.37 A
specific reference to a “manufactured home” on the real property might have
reasonably identified the consumer goods in which a security interest was being
granted as § 84-9-108(e)(2) requires. But here, neither of Gracy’s mortgages referred
to a “manufactured home,” whether generically or specifically. The collateral
description in the security agreements is insufficient to attach a security interest in

35 Consumer-goods transactions are defined in § 84-9-102(a)(24).
36 Cf. In re Pizzano, 439 B.R. 445, 450-53 (Bankr. W.D. Mich. 2010) (collateral type description of
“goods” was sufficient for security interest to attach to debtor’s Corvette where the financing
transaction between debtor and creditor was a commercial transaction to finance debtor’s business
and the Corvette was both a “good” and “consumer good”).
37 Id. at 452 (calling party’s argument that fixtures are not a “type” of collateral defined in the UCC “a
dubious proposition”). Section 84-9-102(a)(41) defines fixtures as “goods that have become so related
to particular real property that an interest in them arises under real property law.”

Case 14-05002 Doc# 57 Filed 01/06/15 Page 15 of 16

the manufactured home as a matter of law.38 Because there is no lien in the
manufactured home to avoid, the trustee’s § 544(a) complaint necessarily fails.39 This
adversary proceeding should be dismissed.


Because Ark Valley’s mortgages insufficiently described Mr. Gracy’s
manufacture home, the liens that Mr. Gracy sought to grant and Ark Valley tried to
obtain never attached, leaving the trustee with nothing to avoid. Judgment shall be
entered for Ark Valley accordingly and a judgment on decision will issue this day.40

# # #

38 Cf. In re Brooks, 452 B.R. 809, 813 (Bankr. D. Kan. 2011) (granting clause of mortgage described
two tracts of real estate and specified that one of the tracts also included a “mobile home”).
39 See In re Seibold, 351 B.R. 741 (Bankr. D. Idaho 2006) (The trustee cannot preserve a nonexistent
lien; where a security agreement did not exist under applicable state law, there is nothing for thetrustee to avoid.); Rajala v. Buerge (In re Buerge), 2013 WL 4409698 at *7 (Bankr. D. Kan. Aug. 13,2013) (Section 544(a) of the Bankruptcy Code empowers the trustee to avoid unperfected but otherwise
valid liens that are attached to property of the debtor; a lien that never attaches is not only
unperfected, it is invalid and entirely worthless to the estate.)
40 Having concluded that no lien attached by virtue of the mortgages, we do not reach the questionwhether the manufactured home was in fact a fixture based upon the evidence presented at trial. Nor
is it necessary to consider whether the enactment of § 58-4214 of the KMHA rendered the Kansas
common law of fixtures inapplicable to manufactured housing secured transactions as the TenthCircuit Bankruptcy Appellate Panel concluded in In re Thomas, 362 B.R. 478 (10th Cir. BAP 2007).

Case 14-05002 Doc# 57 Filed 01/06/15 Page 16 of 16

13-05204 Nielsen et al v. Pollan (Doc. # 55)

Nielsen et al v. Pollan, 13-05204 (Bankr. D. Kan. Jan. 14, 2014) Doc. # 55

PDFClick here for the pdf document.

SIGNED this 13th day of January, 2015.




IN RE: )
MARY DONNA POLLAN, ) Case No. 13-12513
) Chapter 13
Debtor. )


Plaintiffs, )
vs. ) Adv. No. 13-5204

Defendant. )


Mary Pollan offered Sheri Nielsen a hand up in a time of need; she borrowed

money from two banks to buy Sheri a car and fund Sheri’s nursing school


Case 13-05204 Doc# 55 Filed 01/13/15 Page 1 of 14

enrollment while permitting her to live in a rental home Mary owned in Wichita.
Sheri was to make the payments on the debts that Mary incurred for her. When
Sheri failed to repay her, Mary resorted to self-help to collect from Sheri. After
convincing Sheri’s mother, Jackie, to refinance the car loan in her own name, Mary
reclaimed the (Kia) Soul that she had purchased for Sheri and sold it. Now Sheri
and Jackie allege that Mary defrauded them. After they sued her in state court, she
filed a chapter 13 case here. Sheri and Jackie filed this dischargeability complaint
alleging that Mary’s debt to them should be excepted from her discharge because it
was incurred by false representations, false pretenses or actual fraud as 11 U.S.C. §
523(a)(2)(A) provides.

To prevail in this proceeding, Sheri and Jackie Nielsen must show that
Mary’s representations were false when she made them or that she intentionally
fostered a false impression to defraud Sheri and Jackie. Merely demonstrating that
Mary took property in which Sheri and Jackie claimed an interest is not sufficient
to support their fraud-based claims—the only exceptions to her discharge that Sheri
and Jackie pled.1


This is the unhappy story of the misplaced affections and misunderstandings
that often begin with the best intentions. When Sheri Nielsen met Mary Pollan in
2004, she was a single mother. Mary and her husband (now deceased) ranched in
the Cambridge area of southeastern Kansas and Sheri lived nearby with her
daughter, America, and her boyfriend, Abel. Until he left Sheri, Abel helped Mr.
Pollan with miscellaneous work on the ranch. Mary became attached to Sheri and

1 Plaintiffs Sheri and Jackie Nielsen appeared by their attorney Barry L. Arbuckle of Wichita,
Kansas. Defendant and debtor Mary Pollan appeared by her attorney Carl B. Davis of Wichita,


Case 13-05204 Doc# 55 Filed 01/13/15 Page 2 of 14

America acting almost as a mother and grandmother to them. Sheri’s mother Jackie
worked at the café in town, helping to support herself and Sheri’s father who was ill
and on Social Security. Mary frequently cared for America and helped Sheri in
various other ways.

By 2011, Sheri wanted to become a nurse so Mary, now widowed, offered
Sheri three kinds of material assistance.2 She offered to borrow money from her
bank, the Emerald Bank, on her personal vehicle, and lend it to Sheri to pay for
nurses training and some lingering personal debts. She offered to assist Sheri in
purchasing a more reliable car (Sheri was driving a junker) so she could safely get
to Wichita for school. And, Mary offered Sheri a place to live in her rental house in
Wichita. Sheri was a nursing assistant at a nursing home at this time. Even so, she
agreed that if Mary would take these loans out, Sheri would carry the payments so
that Mary’s credit would not be periled.

On July 11, 2011, Sheri and Mary went to the Steven dealership in Wichita
to look at cars for Sheri. When they found a suitable vehicle, a used 2010 Kia Soul,
they applied for financing as co-makers. But, when the dealer told them that the
interest rate would be lower if only Mary were on the note (apparently owing to
Sheri’s bad credit), Mary alone signed a retail installment contract that Steven
assigned to TD Auto Finance and the car was titled to her.3 This was a 72-month
obligation with a $309 monthly payment. Sheri agreed that she would make the

The next day, July 12, Mary signed a note to Emerald Bank for $10,000,
secured by a lien on her 1995 Ford Mustang.4 This note was payable over two years
at $456 per month. The loan proceeds were deposited in her checking account and

2 At the time of the events in this proceeding, Sheri was 33-34 years of age.
3 Ex. C, Ex. D, and Ex. P.
4 Ex. A.


Case 13-05204 Doc# 55 Filed 01/13/15 Page 3 of 14

from there, a $2,000 down payment was made on the Kia Soul by check dated July
19, a $1,700 cash withdrawal was made on July 22, and $6,000 was paid for Sheri’s
nursing school fees by check dated July 20.5 Mary wrote the $6,000 check, leaving
the payee line blank, and gave it to Sheri for nursing school; on the memo line of
the check, Mary noted “Loan Sheri.”6 Mary said she left the payee line blank
because she didn’t know the name of the school; Sheri says Mary actually gave her
the check to cash, that she did so at a Bank of America branch, and gave the money
back to Mary who took it instead to the casino. Someone wrote the name “Kari
Einerson” on the payee line and Ms. Einerson appears to have endorsed the check.
Ms. Einerson was an acquaintance of Sheri’s and according to Sheri used Bank of
America to cash the check (where Einerson banked), because Sheri had no bank
account and could not cash the check on her own.7 Sheri’s version lacks credibility
not least because Sheri concedes she agreed to repay the Emerald debt and because,
as Sheri testified, she was denied admission to nurses training after failing an
entrance examination or course prerequisite. Sheri wouldn’t have agreed to pay
(and, in fact, make payments) if she never received the benefit of the money.

At about the same time, Mary evicted a troublesome tenant from her rental
home on Sheridan Street in Wichita and allowed Sheri and America to move in.

5 See Ex. I. As the cancelled checks on Mary’s bank account demonstrate, she routinely filled out the
memo line of her checks identifying the purpose of the check. The $2,000 down payment to StevenKia (check no. 2100) was dated July 19 and cleared July 21. The $6,000 for nursing school (check no.
2101) was dated July 20 and cleared the bank on July 21. The cash withdrawal was purportedly for
unpaid bills and expenses of Sheri (including to repay loans from family members), but she deniesreceiving the $1,700 withdrawal. Sheri claims that she received a total of $2,700 from the $10,000
Emerald loan – the $2,000 car down payment and $700 cash for unspecified bills. In any event, Sheri
admitted receiving some amount for bills and expenses from Mary and acknowledged her obligation
to make payments on the Emerald loan.
6 Ex. H.
7 Sheri’s story that she was merely cashing the check for Mary is not believable. Mary’s bank account
records show that Mary made cash withdrawals in $50-$100 increments fairly regularly (which shepersonally signed for). See Ex. I, J, K. She needed neither to write a check to obtain cash nor Sheri’s
assistance. If Mary had intended to obtain cash via a check drawn on her account, she could have
made the check payable to “cash” and presented it.


Case 13-05204 Doc# 55 Filed 01/13/15 Page 4 of 14

Sheri was to have free rent for three months, then begin paying $450 rent each
month. Mary intended this arrangement to run for at least six months. While it’s
difficult to understand how Sheri would be able to service $765 each month in debt
while paying $450 in rent, a total of $1,215 monthly, on her minimum wage job and
while she attended school, that appears to have been Sheri’s understanding and
Mary’s expectation.

Sheri defaulted. She missed the first several Emerald payments. She also
missed and was late from the outset on the TD Auto car loan payments, regularly
incurring late fees, while she was off work due to a shoulder injury.8 And, after the
free three months expired, she didn’t pay the rent on the Sheridan property. Mary
addressed this situation by repeatedly asking for the money. When that didn’t work,
in January of 2012, she took the car briefly as a “wake up call” to Sheri that she
expected repayment and in an effort to thwart a possible repossession of the Kia by
TD Auto.9 Not surprisingly, their relationship deteriorated and Sheri stopped
communicating with Mary. Sheri called TD Auto to see about taking the car loan on
herself, but, because TD Auto apparently thought Sheri was Mary’s daughter, they
sent the application to Mary’s Cambridge address. No application was made.

In April, Mary approached Jackie at Jackie’s workplace, the 160 Café in
Cambridge. She told Jackie about the two loans and Sheri’s default. She told Jackie
she wanted them all paid and that she didn’t want to hazard her credit rating. She
specifically asked Jackie to take on the TD Auto loan by refinancing it at her own
bank, Citizens Bank of Kansas. On April 24, 2012, someone representing either
Mary or Citizens Bank called TD Auto to get a payoff amount and, on April 30,

8 See Ex. F, TD Auto Account History showing a total of 4 loan payments on the TD Auto Loan:
October 12, 2011, January 24, 2012, February 6, 2012, and March 13, 2012.
9 Ex. L. TD Auto sent a notice of default addressed to Mary at the Sheridan property but Mary never
received the correspondence because she was not residing at the Sheridan property at the time. Sheri
was living there.


Case 13-05204 Doc# 55 Filed 01/13/15 Page 5 of 14

Jackie closed a loan from Citizens for $17,709, enough to pay off the TD Auto loan
in full.10 Citizens forwarded the funds to TD Auto who, in turn, released its lien
against the Kia Soul on May 22.11 On June 2, the Kansas Department of Revenue
issued a clear certificate of title for the Soul to Mary, its record owner.12

Between May and September, Mary continued to ask Sheri and Jackie for
payment on the Emerald loan. When Sheri stopped taking Mary’s calls, Mary wrote
her letters, stating in one that she was “sorry I didn’t keep the car when I came
after it the first time.”13 Mary also approached Jackie at work, resulting in Jackie
calling the sheriff to remove her. Meanwhile, Citizens needed to complete its
documentation of the Nielsen car loan and, to that end, Citizens requested of Mary
to bring the Soul’s certificate of title to the bank. Mary brought the title to the
Winfield branch office and met with branch president Dennis Knackstedt. She
showed him the title, but took it back, saying she wished to consult with a lawyer
about how she might best proceed to preserve her rights in connection with the
Emerald loan. She then left the bank, never to return. Knackstedt wrote her on
September 28 requesting delivery of the title or repayment of what Citizens Bank
had advanced to pay off TD Auto.14

After receiving the Citizens Bank letter, Mary acted quickly. On October 2,
she and friend drove to Wichita and secured a duplicate key to the Soul from the
Steven dealership. They then went to Andover, Kansas where Sheri worked, and
stopped at the police department to seek assistance in taking the car. When the
police declined to assist, Mary and her friend went to Sheri’s place of employment
and took the car. They returned with it to Steven but, according to Mary, were told

10 Ex. 13, 9.
11 Ex. F and Ex. G. The TD Auto loan was paid off by Citizens on May 9, 2012 (Ex. F).
12 Ex. B.
13 Ex. T.
14 Ex. 16.


Case 13-05204 Doc# 55 Filed 01/13/15 Page 6 of 14

the car was in too poor condition for Steven to buy it. In the intervening months
between July of 2011 and October of 2012, some 34,000 miles had been put on the
car. Sheri’s two dogs had ridden in it a lot; the windshield was cracked, and the car
was filled with toys, clothes, and trash. Nevertheless, when Mary and her friend
went to Carmax, that dealer offered her $8,000.15 Mary accepted and took the
money, signed over her title, and deposited the proceeds in Emerald Bank on
October 3 after paying, at least in part, the Emerald note.16

Sheri reported the car stolen, but because Mary had legal title to it, the
Andover police declined to pursue the complaint. Likewise, Sheri’s parents, who had
apparently insured the car, made a stolen car claim to Farm Bureau. Like the
police, Farm Bureau concluded that Mary’s legal title to the car supported her
taking it, thus denying the claim.17 Jackie and Sheri consulted their counsel and
sued Mary in Sedgwick County District Court.

The state court litigation has been eventful and expensive. Sheri and Jackie
sued not only Mary, but also Carmax, TD Auto, and Citizens Bank on a plethora of
theories. A proposed settlement between them and Citizens Bank was never
consummated. Carmax was dismissed from the case, as was TD Auto. TD Auto
received an award of KAN. STAT. ANN. § 60-211 attorney’s fee sanctions against
Sheri and Jackie’s counsel as part of its dismissal order. Their Kansas Consumer
Protection Act claims against Citizens were likewise dismissed and the Bank’s
“prevailing party” attorneys’ fees were also assessed against them. Their motion to
reconsider that award was denied and their counsel was sanctioned for his conduct
in connection with that matter as well. There are many copied court documents in

15 Ex. E.
16 Ex. M shows that Mary deposited the $8,000 sale proceeds in her savings account, net of $4,890
applied to the Emerald loan. Mary bagged up the personal property in the car and left it at the back
door of the 160 Café for Jackie to return to Sheri.
17 Ex. N.


Case 13-05204 Doc# 55 Filed 01/13/15 Page 7 of 14

evidence, but the status of the remainder of the state court case remains unclear.
Whatever its status is, all that matters in this adversary proceeding is whether
Mary made false representations, employed false pretenses, or committed actual
fraud to obtain the Soul or its value and whether Mary’s debt to Sheri and Jackie
should be excepted from her chapter 13 discharge.18 Mary filed this chapter 13 case
on September 27, 2013. Neither Sheri nor Jackie filed a proof of claim in that


The plaintiffs’ theory of recovery in this case has evolved from a
broad-brushed allegation that Mary committed “fraud” under 11 U.S.C. § 1328(a)(2)
which incorporates § 523(a)(2)(A), to the more narrow issues presented at trial. In
his opening statement, plaintiffs’ counsel (who is also their lawyer in state court)
claimed his clients relied on Mary’s two alleged false statements: (1) that Mary
would assist Sheri in buying the Soul and, when Sheri had completed the payments,
Mary would sign it over to her; and (2) that if Sheri and Jackie would refinance the
car loan, Mary would let them have the car to secure that loan. In addition, counsel
stated that Mary’s conduct as a whole demonstrated false pretenses. Thus, this case
proceeded and will be decided on whether Mary’s statements were knowingly false,
made with intent to deceive, and justifiably relied upon by Sheri and Jackie to their
detriment under § 523(a)(2)(A). Likewise, I will consider whether the plaintiffs
proved that Mary’s conduct demonstrated false pretenses or actual fraud. Those are
the only theories of recovery the plaintiffs pleaded. Exceptions to discharge are
narrowly construed in favor of the debtor to promote the “fresh start” policy of the
Bankruptcy Code and therefore, where there is doubt it is resolved in the debtor’s

18 Nor did Plaintiffs present evidence of the extent of their claimed loss caused by Mary’s fraud.
19 The claims bar date ran on January 28, 2014. Sheri and Jackie are listed on Schedule F as
unsecured creditors with unliquidated claims.


Case 13-05204 Doc# 55 Filed 01/13/15 Page 8 of 14

favor.20 The plaintiffs, as creditors, have the burden of proving their alleged
exception to discharge by a preponderance of the evidence.21

False Representation

A representation is false for § 523(a)(2)(A) purposes if the speaker knows its
falsity when she utters it, that she intended to deceive the creditor by uttering it,
that the creditor relied on the statement to her detriment, and that the reliance was
justifiable.22 The intent to deceive can be inferred from the totality of the
circumstances.23 Sheri and Jackie allege that Mary made two sets of false
statements: first, that while Mary’s name would be on the TD Auto financing and
the Soul’s title, Sheri would own it; and second, that if Jackie and Sheri took out a
new loan to refinance Mary’s TD Auto car loan, the she would let them have the
vehicle as security.

The facts do not support the first alleged false representation. There is
simply no evidence that Mary undertook the purchase of the Soul for Sheri’s use
with the intention of getting someone else to pay for the car or with designs on
ultimately keeping it for herself. She already had two cars, the Mustang on which
she borrowed from Emerald and a 2010 Ford Fusion. Mary and Sheri shared the
understanding that Sheri would complete the payments and eventually receive the
vehicle. If Mary formed the intention to mulct Sheri and Jackie into paying for the
Soul so she could keep it, she did so after she purchased it from Steven and
borrowed the purchase price from TD Auto and after Sheri defaulted on payments.
Mary’s pre-purchase representation that Sheri would own the car once she’d made
the loan payments was not false and was not made with the intent to deceive. There

20 Jones v. Jones (In re Jones), 9 F.3d 878, 880 (10th Cir. 1993); Herman v. White (In re White), 519

B.R. 832, 834-35 (Bankr. N.D. Okla. 2014); In re Coates, 519 B.R. 842, 848 (Bankr. D. Utah 2014).
21 In re White, 519 B.R. at 835.
22 Bank of Cordell v. Sturgeon (In re Sturgeon), 496 B.R. 215, 222 (10th Cir. B.A.P. 2013).
23 Copper v. Lemke (In re Lemke), 423 B.R. 917, 922 (10th Cir. B.A.P. 2010).

Case 13-05204 Doc# 55 Filed 01/13/15 Page 9 of 14

was no evidence that Mary had no intention of fulfilling her promise to transfer the
car to Sheri upon repayment of the loans when the agreement was struck in July of
2011.24 Only when Sheri breached the agreement by not repaying the loans did
Mary’s intent change.25

The second representation allegation also lacks factual support. The evidence
is less than clear whether Mary’s conversations with Jackie at the café referred to
the Emerald loan. Jackie says Mary said nothing to her about it until after Jackie
and Sheri had signed the Citizens Bank note that refinanced the TD loan. Mary
says that she did in fact discuss the Emerald note with Jackie because she
considered the Emerald loan, the TD Auto loan, and the lease of the Sheridan
property a coordinated effort to help Sheri. The plaintiffs’ evidence of the second
representation is iffy at best. Jackie and Sheri had the burden to prove that Mary
made the false statement; I cannot conclude that they met that burden. Rather,
given Mary’s continuing belief that the loans and lease transaction were elements of
one arrangement between her and Sheri, it seems more likely that she would have
discussed the Emerald loan with Jackie. Repayment of the Emerald loan (secured
by Mary’s Ford) was, at least in Mary’s mind, a condition precedent to the Nielsens
getting the Kia.26 Mary’s subsequent conduct also suggests no misrepresentation
was made. The Citizens Bank loan, payoff of TD Auto, and lien release on the Soul
occurred in April and May of 2012. Mary took no steps to seize the Soul until
October, after Citizens Bank made demand upon her and after months of Mary

24 See In re Borschow, 454 B.R. 374, 395 (Bankr. W.D. Tex. 2011) (Mere promise, to be executed inthe future, is insufficient to make debt nondischargeable under § 523(a)(2)(A) unless debtor had no
intention of fulfilling the promise when made.).
25 This first representation is not in any event actionable by Jackie as Mary made no representationsto Jackie prior to purchase of the Kia. Jackie learned of Mary’s 2011 loans to Sheri after the fact.
26 In re Bird, 224 B.R. 622, 627 (Bankr. S.D. Ohio 1998) (If there is room for inference of honest
intent, nondischargeability must be resolved in favor of debtor.).


Case 13-05204 Doc# 55 Filed 01/13/15 Page 10 of 14

asking Sheri and Jackie for repayment of the Emerald Bank loan. Indeed, Mary’s
correspondence with both Jackie and Sheri in August, evidences Mary’s insistence
on Sheri’s timely payments of the Emerald Bank loan or getting it out of Mary’s
name so as not to damage her credit.27 That was the premise of Mary’s and Sheri’s
“deal” from the outset. Had Sheri made the Emerald payments, Mary likely would
not have seized the Kia.28

False Pretenses

While false representation claims require express statements, false pretense
claims involve “implied representations intended to create and foster a false
impression.”29 This can include conduct and material omissions. As with the
Nielsens’ false representation claims, their proof falls short here. They failed to
prove that Mary’s initial conduct in borrowing money for Sheri to get her a car and
help finance her nursing school ambitions was done to create and foster a false
impression. The evidence demonstrates that, based largely on their friendship and
trust, Mary undertook to help Sheri, and through her, Sheri’s daughter, find a way
to a better life. Indeed, Sheri testified to her understanding that she would receive
the car when she had completed the payments on the TD loan. She also testified
that she attempted to keep the Emerald payments current until she was hurt and
unable to work. Sheri contacted TD Auto about moving the loan into her own name
and asked her mother about it. Sheri also knew that she would be obligated to pay
rent on the Wichita house at some point. Sheri and Jackie failed to demonstrate
that Mary’s conduct or speech “fostered a false impression” at least during the

27 Ex. T, U.
28 See also Ex. 15 – interrogatory answers nos. 10 and 11 indicate Mary’s intent and Sheri’s promise
that she would repay both the Emerald Bank loan and the TD Auto loan before ownership would be
transferred to Sheri.
29 In re Sturgeon, 496 B.R. 215, 223.


Case 13-05204 Doc# 55 Filed 01/13/15 Page 11 of 14

summer 2011.30

Whether Mary fostered a false impression in her dealings with Jackie and
Citizens Bank is a much closer call. While it is not clear to me that Mary expressly
and falsely represented to Jackie that the Nielsens would get the Kia once they
refinanced the TD Auto loan, some of her conduct after that time might suggest that
she “fostered a false impression” about that. Whether she in her discussions with
Jackie made payment of Emerald loan a condition precedent to Sheri and Jackie
obtaining the Kia or not, Mary clearly understood that no third bank would likely
make a car loan without receiving a lien on the car. Indeed, she had to give Emerald
Bank a lien on her Ford to secure the nursing home loan. Mary wanted out from
under the TD Auto loan, but she also wanted the Emerald loan repaid. She showed
the Kia title to Mr. Knackstedt at Citizens Bank knowing that the TD Auto loan
had been paid off, but then refused to sign it over and carried it off. Then, in
October of 2012, after Citizens wrote and demanded that either the title be turned
over or that Mary take over the loan, Mary and her friend took possession of the Kia
and sold it.

In the end, Mary’s obligation to TD Auto was repaid by Jackie and Sheri’s
refinance at Citizens and her liability to Emerald was reduced when she sold the
Soul and applied its proceeds to that debt.31 But the issue in this proceeding was
whether that was the outcome she had in mind when she approached Jackie about
the TD Auto refinance.32 The record is simply unclear. Mary saw these transactions
as one: she incurred credit that Sheri couldn’t have gotten from a legitimate

30 The evidence established that Jackie was not even privy to Mary’s and Sheri’s dealings until after
the car was purchased.
31 The record is unclear on this point. Ex. M shows that Mary applied $4,890 to the Emerald Bank
loan but it is unclear whether this paid off the loan in full.
32 There was no evidence that Mary had any direct communication with Citizens Bank as to the
refinance transaction until after it was consummated.


Case 13-05204 Doc# 55 Filed 01/13/15 Page 12 of 14

financial institution, credit that Sheri agreed to repay. While a banker or lawyer
might understand that retaining the Kia to “secure” Sheri’s paying Mary back for
the Emerald loan wasn’t legally proper, none of these three parties had either the
education or training to understand that. That taking the car to pay the Emerald
loan made sense to Mary suggests that she lacked requisite wrongful intent.33 In
her mind, even after the TD Auto loan had been repaid, Mary still had a debt to
collect and the Kia was the only means to do it, because Sheri had stopped making
payments. She took the asset to pay a debt. And as noted under the false
representations section herein, Mary continued to pursue Sheri’s timely loan
payment on the Emerald Bank loan after TD Auto was paid off and before she
resorted to the Kia.34 That is not enough to support a finding of false pretenses

Actual Fraud

To prevail on an actual fraud claim, the Nielsens had to show that Mary
deliberately engaged in a scheme to deprive them of property or a legal right. As
discussed above, they did not prove that Mary had any such plan or motive in mind
in July of 2011 when she purchased the Kia. Nor did they show that Mary had a
malign plan in mind when she approached Jackie about refinancing the Kia. What
appears to have happened here is that Sheri’s failure to maintain the payments
that Mary generously incurred in her behalf led to hurt feelings and distrust
leading her to take matters into her hands. After Mary realized that Sheri and
Jackie couldn’t or wouldn’t repay her for the Emerald loan, she repossessed a car to
which she had received clear title, sold it, and paid the Emerald loan herself. The

33 In correspondence to both Jackie and Sheri in August 2012, Mary lamented not keeping the car
when she repossessed it the first time. Ex. T, U. This negates the suggestion that she intended all
along to keep the car when she first approached Jackie to refinance the TD Auto loan.
34 See Ex. T, U.


Case 13-05204 Doc# 55 Filed 01/13/15 Page 13 of 14

Nielsens failed to prove the existence of a scheme to deprive or cheat them. Mary’s
only “scheme” was to collect from the Nielsens what she felt she was owed and what
Sheri had promised to pay.


What transpired in this case is unfortunate at best. Well-intended loans
between close friends or relatives frequently go awry when emotions cloud a
person’s lending judgment. Mary Pollan’s judgment was thus clouded. But her
conduct in this case is consistent with her belief that Sheri had agreed to repay her
for the credit she extended – the TD Auto loan and the Emerald loan. Once Sheri
and Mary’s communication broke down, Mary collected what she could by
repossessing and selling the car titled in her name. While discrete pieces of this
transaction show Mary in a negative light, Sheri and Jackie have failed to
demonstrate by a preponderance of the evidence that she falsely represented her
intentions to them, that she fostered a false impression, or that she made the Kia
purchase as part of a scheme to retain the car. Nor does it appear that Mary
intended to take the car at the time she approached Jackie about refinancing it. The
plaintiffs failed to demonstrate Mary’s bad intent; their complaint fails.35

Mary is entitled to judgment on the plaintiffs’ complaint and judgment will
be entered this day accordingly.
# # #

35 The Court does not condone Mary’s self-help initiative and notes that, in a non-bankruptcy
setting, Jackie and Sheri might be able to show that they had equitable title to the Kia and that
Mary converted it when she repossessed and sold the Soul. That was pled in state court, but not here.
Conversion can form the basis for a Chapter 7 discharge exception under § 523(a)(6) (willful and
malicious damage to property) when the converter is shown to have the requisite malicious intention.
That exception is not incorporated as one of the exceptions to a chapter 13 full payment discharge
under §1328(a)(2).


Case 13-05204 Doc# 55 Filed 01/13/15 Page 14 of 14

14-05002 Morris v. Ark Valley Credit Union et al (Doc. # 46)

Morris v. Ark Valley Credit Union et al, 14-05002 (Bankr. D. Kan. Oct. 30, 2014) Doc. # 46

PDFClick here for the pdf document.

SIGNED this 30th day of October, 2014.




IN RE: )
JEFFREY KENT GRACY, ) Case No. 13-11917
) Chapter 7

Debtor. )

Plaintiff, )
vs. ) Adv. No. 14-5002

Defendants. )


Can the trustee avoid an unperfected lien in a mobile home when the creditor

denies that it took a lien in the home as security for a revolving line of credit extended

to debtor? Debtor Jeffrey Gracy lives in a 1994 Fuqua manufactured home that is set


Case 14-05002 Doc# 46 Filed 10/30/14 Page 1 of 7

on real estate he owns. He granted two separate mortgages to Ark Valley Credit
Union – the first in 2009 in the amount of $21,000 and the second in 2010 in the
amount of $26,000 – to secure a revolving line of credit. Both mortgages legally
describe the subject real estate at 617 W. Avenue G, Caldwell, Kansas, together with
all improvements and fixtures; the mortgages do not describe, specifically or
generally, the manufactured home. The trustee seeks to avoid the alleged lien in the
mobile home under 11 U.S.C. § 544(a) claiming the mobile home is property subject
to the mortgage lien and was unperfected on the date of the petition. Ark Valley
moved to dismiss the complaint under Fed. R. Civ. P. 12(b)(6), made applicable to
adversary proceedings by Fed. R. Bankr. P. 7012(b), asserting that it claims no lien
in the mobile home and attaching exhibits and evidentiary material to its motion.
Limiting my review to the allegations of the trustee’s avoidance complaint, the Court
concludes that it satisfies the facial plausibility standard of Twombly1 and Iqbal2 and
therefore, Ark Valley’s motion to dismiss for failure to state a claim must be DENIED.

 Because material factual questions remain regarding the revolving line of
credit transactions between debtor and Ark Valley, whether the mortgage lien
attached to the mobile home, the home’s worth, and whether non-parties may claim
an interest in the home, I direct that this matter proceed to a status conference on
November 7, 2014 in advance of the evidentiary hearing, currently set for November

1 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L.Ed. 2d 929 (2007) (plaintiff must
allege sufficient facts to render the claim “plausible on its face.”).
2 Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed. 2d 868 (2009).


Case 14-05002 Doc# 46 Filed 10/30/14 Page 2 of 7

18, 2014.3

Procedural Background

Debtor filed his chapter 7 petition on July 25, 2013. The trustee filed this
adversary complaint on January 6, 2014 seeking to avoid and preserve Ark Valley’s
alleged lien in the debtor’s Fuqua manufactured home under § 544(a). After first filing
an answer to the complaint, Ark Valley moved to dismiss the complaint, contending
that because it did not claim a lien in the mobile home, the trustee had failed to state
a claim upon which relief could be granted under Fed. R. Civ. P. 12(b)(6), incorporated
in adversary proceedings by Fed. R. Bankr. P. 7012(b). In its supporting
memorandum, Ark Valley set forth a separate statement of facts, supported by copies
of the mortgages referenced in the complaint and attached other documents that were
not part of the pleadings in the case. In his response, the trustee did not admit or
deny Ark Valley’s statement of facts, but alleged his own facts, also supported by the
mortgages and materials outside the pleadings, including the affidavit of debtor that
purports to describe the manner in which the mobile home is affixed to the real estate.

I decline to convert Ark Valley’s motion to dismiss to one for summary
judgment as Fed. R. Civ. P. 12(d) permits, and except for the mortgages which are
referenced in the complaint, copies of which both parties have attached to their
memoranda, I do not consider any of the non-pleading materials that the parties have
presented in evaluating whether the trustee’s complaint states a claim pursuant to

3 The chapter 7 trustee J. Michael Morris appears on his own behalf. Ark Valley Credit Union appearsby its counsel Eric D. Bruce. Pro se debtor Jeffrey Gracy does not appear and a default judgment was
entered against him on February 28, 2014. See Adv. Dkt. 20.


Case 14-05002 Doc# 46 Filed 10/30/14 Page 3 of 7

Rule 12(b)(6).4 Converting the motion would be futile because there are genuine
disputes of material fact that cannot be determined in a summary proceeding--the
intent of the parties in granting the mortgages and entering into the revolving line of
credit transaction, the value of the manufactured home, and the value of the avoided
lien should the trustee’s avoidance claim be established.

The Trustee’s Complaint

The trustee’s complaint is brought under § 544(a) and § 551 to avoid and
preserve an alleged unperfected lien in the manufactured home for the benefit of the
estate. Section § 544(a)(1) grants the trustee the status of a hypothetical lien creditor
as of the date of the bankruptcy petition. The trustee can avoid liens that were
unperfected on that date. Under Kansas law, the rights of the person who became a
lien creditor prior to perfection have priority over the person holding an unperfected
security interest.5 Thus, to prevail on an avoidance complaint, the trustee must show
that the creditor has a valid lien in the subject property and that the lien is not
properly perfected as of commencement of the bankruptcy case. If the creditor’s lien
never attaches, there is no lien for the trustee to avoid and it has no value to the

4 Fed. R. Bankr. P. 7012(b) incorporates Fed. R. Civ. P. 12(d). Rule 12(d) does not require the Court toconvert the motion to one for summary judgment unless it considers matters that are outside the
pleadings and are not public records. The court has broad discretion in determining whether or not to
accept materials beyond the pleadings. Lowe v. Town of Fairland, 143 F.3d 1378, 1381 (10th Cir. 1998).
However, in certain circumstances, a court may consider documents that are referenced in the
complaint, but not attached, without converting the motion to one for summary judgment. See Thomas

v. Kaven, 765 F.3d 1183, 1197 (10th Cir. 2014) (when documents are referenced in a complaint that are
central to plaintiff’s claims and indisputably authentic, court may consider such documents when
resolving a motion to dismiss without converting the motion to summary judgment); GFF Corp. v.
Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384-85 (10th Cir. 1997) (on motion to dismiss incontract dispute, court’s consideration of letter that purported to satisfy the statute of frauds was noterror where letter was referred to in the complaint, authenticity of the letter was not disputed, andletter was attached to and discussed in plaintiff’s brief in opposition to the 12(b)(6) motion).
5 KAN. STAT. ANN. § 84-9-317(a) (2013 Supp.); In re Haberman, 516 F.3d 1207 (10th Cir. 2008).

Case 14-05002 Doc# 46 Filed 10/30/14 Page 4 of 7


Here, the trustee alleges that debtor granted two prepetition mortgages to Ark
Valley on January 27, 2009 and on January 19, 2010 respectively, on Lots 32, 34, 36
and 38, Block 85 in Caldwell, Kansas. He alleges that the debtor’s 1994 Fuqua
manufactured home is part of the mortgaged property. And finally he alleges that the
security interest or lien in the manufactured home was not perfected as of the date of
the bankruptcy filing, subjecting it to the trustee’s avoidance powers under § 544(a).

These allegations meet the Twombly facial plausibility standard for stating a
claim for avoidance of the alleged lien on the manufactured home under § 544(a). The
complaint alleges the execution of an instrument (the mortgages) by the debtor to Ark
Valley. Ark Valley admits that the debtor executed them in its answer.7 The trustee’s
allegation that the mortgaged property includes the manufactured home effectively
asserts that a security interest attached to the manufactured home by virtue of the
mortgages.8 Taken together the trustee asserts that debtor granted a lien in the
mobile home.

While Ark Valley suggests that it did not intend to take a security interest in
the mobile home and therefore the lien never attached, there is no need to decide that

6 Rajala v. Buerge (In re Buerge), 2013 WL 4409698 at *7 (Bankr. D. Kan. Aug. 13, 2013) (under §
544(a), the trustee seeks to avoid unperfected – but otherwise valid – liens that are attached to
property of the debtor; a lien that never attaches to property is not only unperfected but also invalid
and entirely worthless to the estate).
7 Adv. Dkt. 5, ¶ 1.
8 See In re Brooks, 452 B.R. 809, 813 (Bankr. D. Kan. 2011) (mortgage that creates or provides for a
security interest in fixtures and is signed by debtor constitutes an authenticated security agreement
necessary for attachment of security interest in mobile home under KAN. STAT. ANN. § 84-9-203,
Kansas’ version of the Uniform Commercial Code); See also, KAN. STAT. ANN. § 84-9-102(a)(73)
(defining term ‘security agreement’).


Case 14-05002 Doc# 46 Filed 10/30/14 Page 5 of 7

ultimate issue at this stage. I only need to determine if the trustee stated a facially

plausible claim. He did. He alleged facts from which a court might conclude that a

lien attached to the mobile home by virtue of the mortgage. That raises the trustee’s

right to relief above the speculative level.9 Only at trial will I interpret the mortgage

instruments and consider any other extrinsic evidence the parties may offer about

what they mutually intended when the mortgages were granted.10

Finally, the trustee alleges that the alleged lien on the manufactured home

was unperfected on the bankruptcy petition date, the key element for the trustee to

exercise his avoiding power under § 544(a). While it might have been preferable to

attach the mortgages upon which the trustee’s claim is founded to the adversary

complaint, he has nonetheless sufficiently pled a claim to avoid and preserve the

purported lien of Ark Valley in the debtor’s home.11 Ark Valley’s motion to dismiss is


Other Necessary Parties

9 Twombly, 550 U.S. 544, 555. A claim has facial plausibility when factual content is pled that allowsthe court to draw the reasonable inference that the defendant is liable for the misconduct alleged.
Iqbal, 556 U.S. at 678.
10 See In re Mahan, 2007 WL 4387420 at *3-4 (Bankr. N.D. Okla. 2007) (In addition to satisfying the
technical requirements of UCC Article 9 (§ 9-203) for a security agreement and attachment, court must
satisfy itself that the parties intended to create a security interest in the subject property; like all
contracts, there must be a meeting of the minds that a security interest attach to the collateral at
issue.); Barkley Clark and Barbara Clark, 1 THE LAW OF SECURED TRANSACTIONS UNDER THE UNIFORM
COMMERCIAL CODE § 2.02[3][b] (3rd Ed. 2014) (court’s role is to determine the mutual intent of the
parties; security agreement is no different from any other contract); Baldwin v. Hays Asphalt Const.,
Inc., 20 Kan. App. 2d 853, 857, 893 P.2d 275 (1995) (In determining whether security interest exists,
the intent of the parties controls; that intent is determined by the language used in the instrument
and considering the conditions and circumstances when the contract was made); First Nat. Bank and
Trust Co. of Oklahoma City v. Atchison County Auction Co., Inc., 10 Kan. App. 2d 382, 386, 699 P.2d
1032 (1985) (where ambiguity in a security agreement results from inclusion of the location of the
collateral, parol evidence is admissible to determine the intent of the parties; evidence that both bankand debtor intended security agreement to cover all of debtor’s livestock, despite security agreement’sdescription of collateral that included location of some of the cattle).
11 See Fed. R. Civ. P. 10(c).


Case 14-05002 Doc# 46 Filed 10/30/14 Page 6 of 7

Ark Valley provided an exhibit suggesting that the manufactured home was
last titled to Leonard and Gladys Tomlin and that Green Tree Financial Corporation
claimed a security interest in it.12 The title appears to have been issued in August of
1994. Neither the Tomlins nor Green Tree are parties to this adversary proceeding.
Their interests in the mobile home, if any, cannot be determined or protected in their
absence because they have no notice of the proceeding. The Court may not be able to
render complete relief among debtor, the Trustee, and Ark Valley without them and,
if the present parties do not join them or explain their failure to do so, the Court is
obligated to do so.13

Conclusion and Orders

Ark Valley’s motion to dismiss is DENIED. Trial counsel are directed to appear
for a final pretrial status conference in this matter on November 7, 2014 at

11:00 a.m. at which time they should be prepared to address whether all necessary
parties have been properly joined in this adversary proceeding as well as any other
matters typically considered at final pretrial conference.14 Trial of this matter
remains scheduled for November 18, 2014, subject to further order of the Court.
# # #

12 Adv. Dkt. 34, p. 40.
13 See Fed. R. Civ. P. 19(a)(1) and (2); Fed. R. Bankr. P. 7019.
14 The Court entered the Final Pretrial Order in this matter on October 20, 2014. Adv. Dkt. 40.


Case 14-05002 Doc# 46 Filed 10/30/14 Page 7 of 7

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